Annual Report 2007

BALTIKA BREWERIES ANNUAL REPORT 2007

Where Russia is... 5 11 17

BEER MARKET. BALTIKA POSITION BRAND PORTFOLIO

23 25

LETTER OF PRESIDENT SALES SYSTEM FINANCES. INVESTMENTS

29 33

KEY PROJECTS SOCIAL RESPONSIBILITY

37 47 53

CORPORATE GOVERNANCE SECURITIES CONSOLIDATED FINANCIAL STATEMENTS CONTENTS

LETTER OF PRESIDENT 5

COMPANY PORTRAIT 6

MISSION, VISION AND STRATEGIC GOALS 7

EVENTS 2007 8

BEER MARKET. BALTIKA POSITION 11

BRAND PORTFOLIO. IMAGE PROJECTS 17

SALES SYSTEM 23

FINANCES. INVESTMENTS 25

KEY PROJECTS 29

SOCIAL RESPONSIBILITY 33

CORPORATE GOVERNANCE 37

PRINCIPLES OF CORPORATE GOVERNANCE 37

MANAGEMENT BODIES 38

INFORMATION DISCLOSURE 43

RISK MANAGEMENT 44

SECURITIES 47

CONSOLIDATED FINANCIAL STATEMENTS 53

INTERESTED PARTY TRANSACTIONS 88

CONTACT INFORMATION 92 LETTER OF PRESIDENT LETTER OF PRESIDENT

Dear Ladies and Gentlemen,

For over ten years in a row Baltika Breweries has been the leader on the Russian beer market, but we are not resting on our laurels. From year to year, we strive to be better, because we aim to become the benchmark for the brewing industry around the world, and the year 2007 marked one further step in this direction.

We reached the ambitious goals set for this year, having increased sales volume and market share against a background of tougher competition and having kept profitability at a high level despite the unprecedented growth in costs for raw materials and logistics. Our excellent financial results enabled us to increase substantially the dividends paid out per share.

In 2007 the Russian beer market grew at unusually high pace, yet the Company’s sales volumes grew even faster, increasing our market share to 37.6%.

In 2007 our title brand Baltika was named the most valuable FMCG brand in Russia, as well as one of the most dynamic and promising among the major beer brands in the world. In the near future, the Baltika brand will take the №1 position in sales within Europe and in the longer perspective we expect the Baltika brand to take one of the top positions worldwide. In 2007, the global reach of our export sales was extended to 46 countries (up from 33 in 2006), and in April licensed production of Baltika №3 started in the UK.

Baltika Breweries responds quickly to changing conditions in the Russian beer market and invests heavily in innovation, development and promotion of power brands, as well as in capacity extension in regions of rising consumption. In 2007 we successfully tripled the capacity of the Baltika-Samara brewery. We also started the doubling of production capacity in Voronezh and the construction of a new (eleventh) brewery in Novosibirsk.

While developing the business, we always bear in mind the quality of production and environment. At all Company’s breweries, we use the most modern equipment and automated systems of process control that ensure high tech production, rational use of resources and environmental safety.

Baltika Breweries considers social responsibility as one of its main obligations. Being the largest taxpayer in the regions, it ensures favorable working conditions for its employees and is active in solving social problems.

The Company has drawn up and implemented the Corporate Culture Code, which is an essential tool for shaping an integrated and strong team of professionals.

We are improving the system of corporate governance and applying best international practices in order to raise the efficiency of our business processes, to add value to the Company and to increase earnings per share. Baltika Breweries today is the largest FMCG company in Russia in terms of market capitalization. In December 2007, Baltika received a national award as ‘Company of the Year’ for its substantial contribution to the development of related sectors of the Russian economy including agriculture.

I would like to thank the whole team of Baltika for their dedicated and efficient work in 2007, to thank our partners for mutual understanding and cooperation, and to thank our shareholders for their trust and support. The successful development of Baltika Breweries is the result of our joint efforts.

In 2008 we face new challenging tasks and I am firmly convinced that we have enough power and skills to complete them. We will have to strengthen further the positions of the Company and Baltika brand both in Russia and worldwide, making them the symbols of contemporary Russia – open, competitive and joyful.

Anton Artemiev President, Baltika Breweries

LETTER OF PRESIDENT 5 COMPANY PORTRAIT – 17 YEARS OF STEADY GROWTH AND SUCCESS

HISTORICAL NOTE

1990 On the basis of a new brewery of the Leningrad production association of the brewing and soft drinks industry Lenpivo, the state-owned enterprise Baltika Brewery was formed

1992 Reorganisation of the state-owned enterprise into an open joint-stock company The Baltika trade mark was created

1993 Baltic Beverages Holding AB became the brewery’s majority shareholder Large-scale investment program for the reconstruction and modernization of production started, when the implementation had completed Baltika became the first brewery in Russia with the most modern European equipment installed

1996 Baltika became the leader on the Russian beer market

1997 Baltika acquired a controlling interest in the brewery Donskoye Pivo, Rostov-on-Don

1998 The brewery was renamed into Baltika Breweries OJSC The Company started development of sales subdivisions network in the regions

2000 Baltika acquired a controlling interest in the brewery Tulskoye Pivo Maulterie Soufflet Saint-Petersburg, the largest malt-house in Russia, built jointly with the French company Groupe Soufflet was opened

2003 Baltika completed the construction and put into operations new breweries in Samara and in Khabarovsk

2004 New malt plant was opened in Tula

2006 Merger of Baltika with Vena, Pikra and Yarpivo Five more breweries joined the Company: in St. Petersburg, Chelyabinsk, Krasnoyarsk, Yaroslavl and Voronezh The total number of breweries in the merged company reached 10

2007 Start of construction on the eleventh brewery in Novosibirsk New malt house was opened in Yaroslavl

BALTIKA TODAY

Facts Figures

The largest FMCG company in Russia Market capitalisation of around $8 bln

Leader of the Russian beer market Share of Russian beer market is 37.6%

45 mln hl per year The highest production capacity in Russia 11 breweries in Russia 3 malt houses

The strongest team of professionals Around 12,000 employees

Everywhere in Russia Sales in 98% of the points of sale in Russia

Brand portfolio covering all consumer need states Around 30 beer and 10 non-beer brands

Baltika is the largest and most valuable consumer The market share of the Baltika brand is 12.7% brand in Russia Value of the brand is $2.2 bln

Export to 46 countries around the world 70% of the volume of Russian beer exports Worldwide operations Baltika is the brand №2 in Europe in terms of volume Company’s share of the world beer market reached 2.5%

6 ANNUAL REPORT 2007 MISSION, VISION AND STRATEGIC GOALS

Mission

We are creating a high quality product which gives people pleasure in their get-togethers, making their lives brighter and more interesting Vision We strive to be the benchmark for the brewing industry, the company setting the standards and a reference point for brewing companies around the world

For us, being the benchmark means being the leader in three areas: best brands, best team, best results

Best brands

In each segment of the market, we occupy the leading position and we have strong brands which people select not only on the basis of their taste and possibilities but also thanks to their attitude towards our Company

Best team

In our Company, the most professional specialists in each field cooperate with one another effectively

Best results

Our Company works with the highest and most steady profitability from operations among the biggest brewing companies of the world

Objectives

To raise our market share on Russian beer market while keeping high profitability To take the Baltika brand to leading positions in the world

Strategy

Building strong brands with focus on premium and innovations Leadership in all price segments, regions and sales channels Search for additional sources of profitable growth by: • geographic expansion • development of closely related areas Raise the efficiency of business processes and operational excellence Creation and continuous development of the best team of professionals

Values

Responsibility Cooperation Innovation Striving for perfection

MISSION, VISION AND STRATEGIC GOALS 7 EVENTS 2007

January

29 By the decision of the Board of Directors the National Registry Company CJSC was approved as Baltika’s registrar

February

21 A new sports and health centre for Baltika employees and their families was opened in the settlement Molodezhnoye of the Kurortny District (Leningrad region)

March

5 New malt plant with the capacity of more than 50,000 tonnes per year was opened in Yaroslavl

15 Baltika announced the 2006 results. The successful merger of Baltika, Vena, Yarpivo and Pikra in 2006 facilitated strong financial results performance

April

1 The decision was taken to increase the rated capacity of new brewery in Novosibirsk to 4.5 mln hl per year. The amount of investments in the project exceeds €130 mln

12 A License Agreement was signed in Edinburgh for Baltika №3 production in Great Britain till the end of 2021. For the first time in history, a Russian FMCG brand is produced in Western Europe on a permanent basis

12 At the 7th All-Russian conference of beer and non-alcoholic beverages producers, Baltika employees received awards in two of the main nominations: the ‘Order of merit for the brewing industry development’ and the medals ‘Best specialist of the brewing industry.’ The association’s highest award ‘Amber Star,’ was conferred on Baltika Breweries in the category ‘For the successful development of business reputation’

18 For the third time, Baltika was recognized as best taxpayer of St. Petersburg of 2006

23 Baltika brand was included in the list of the biggest world brands, made for the Financial Times by a research company Millward Brown Optimor (МВО). Among the international beer brands, Baltika received the highest rating for the potential and for the brand’s contribution to the Company’s profits

26 Baltika introduced the Internship program of students support developed by its HR specialists and aimed at employing young specialists

May

15 The Annual General Shareholders Meeting approved Baltika results, financial statement and annual report for the year 2006. The dividends per share grew by 62% compared with dividends in 2005

16 ‘Baltika to Russia!’ program started – 20 festivities, concerts and special events for the citizens of 15 Russian cities

8 ANNUAL REPORT 2007 EVENTS 2007

June

20 The Ministry for Economic Development and Trade of the Russian Federation honored Baltika Breweries with the title of ‘Best Russian Exporter’ for the sixth time

July

3 The Financial Times published its list of the 500 biggest European companies. Baltika Breweries continued to be the leader among the food companies of Eastern Europe

20 One of the top specialized American publications – Institutional Investor – summarized the results of its fourth annual research ‘Leaders of Russian business.’ First place among heads of the Russian consumer sector companies went to Baltika President, Anton Artemiev

August

20 The project to triple capacity of Baltika’s brewery in Samara, taking it from 2.0 to 6.5 mln hl per year, was completed. The total cost of the investment project amounted to €101 mln

September

1 Baltika Breweries announced the restructuring of its sales system in Russia

October

15 At Extraordinary General Shareholders Meeting carried out in the form of absentee voting, the decision to reduce Baltika Breweries’ issued share capital by buying back and cancelling shares has been taken

30 The Baltika brand was named among the three most valuable brands in Russia according to evaluation by the Interbrand Group, an international consulting company. The value of the brand was put at $2.2 bln

November

6 Baltika-Khabarovsk brewery became one of the three winners of the Eco-Leader-2007 competition arranged by the Khabarovsk Krai organisation ‘All-Russian society for the preservation of nature’ with support from the government of the Khabarovsk Krai. The brewery won in the category ‘Company – Big Business’

20 Baltika Breweries redeemed first bond issue with a total nominal value of 1 bln rubles

December

5 Baltika received the title of ‘Company of the Year, 2007’ in the category ‘Industry: Low alcohol beverages and beer’– the national prize in the field of business

20 The Government of St. Petersburg honored the Company as ‘Best Exporter of St. Petersburg’

EVENTS 2007 9 BEER MARKET. BALTIKA POSITION BEER MARKET. BALTIKA POSITION

GLOBAL MARKET

The world beer market is continuing to grow. This is the result of strong development of the less saturated markets (especially Brazil, Russia, India and China), the trend towards consumption of more expensive premium products, development of the retail infrastructure and sales of draught beer, the launch of beer specialities, the opening up of new niches in the developed markets, as well as increasing competition among the world leaders. According to data supplied by the research company Euromonitor, worldwide beer sales grew by 4.3% in 2007 and reached 1.74 bln hl.

Russia is one of the largest markets in the world in terms of volume and takes the third place after China and the USA.

Beer markets by volume in 2007 (mln hl)

381 400 381

350

300 244 250

200

150 111 105 93 100 64 60 56 36 50 33

0 USA Brazil Spain China Japan Russia Poland Mexico Germany Great Britain

Sources: Estimates of Euromonitor, Rosstat, Company estimates

RUSSIAN BEER MARKET

In 2007, the Russian beer market performed at the highest rate of growth in the last six years – 15.7% (compared to the previous year). Such impressive growth In 2007, the Russian beer market was driven by several factors: developed strongly organic growth of consumption stimulated by the growth of macroeco- and performed at the nomic and consumer indices, including disposable income growth; highest rate of growth in the last six years – unusually mild weather in the first half of the year; 15.7% regulatory changes consequences to alcoholic drinks.

The volume of beer consumed in Russia in 2007 reached 111 mln hl.

Growth of the Russian beer market, 2000-2007

Year 2000 2001 2002 2003 2004 2005 2006 2007

Beer market, mln hl 52 64 69 74 82 87 96 111

Growth of beer market, % 18.8 21.4 8.3 7.6 11.1 6.0 10.1 15.7

Sources: Company estimates

BEER MARKET. BALTIKA POSITION 11 BEER MARKET. BALTIKA POSITION

Growth of beer consumption per capita in Russia, 2000-2007 (litres)

78 80 67 70 60 51 57 60 43 47 50 36 40 30 20 10 0 2000 2001 2002 2003 2004 2005 2006 2007

Sources: Rosstat, Company estimates

Per capita beer consumption in Russia in 2007 rose from 67 to 78 litres.

The Russian beer market has been distinguished by significantly different consumption of beer in regions. Whereas in Moscow or Northwest regions consumption goes to 100 litres per capita and the market is close to saturation, in other regions this figure is considerably lower and amounts to 65-70 litres. Precisely in these less saturated regional markets consumption is developing at higher rates.

The Russian beer market is one of the most consolidated and competitive. The five key players – Baltika, Sun InBev, Heineken, Efes and SABMiller – hold 85% of the market and have been increasing this share year after year.

Shares of the Russian market held by the leading beer producers in 2007

14.7%

Baltika 37.6% 6.1% SUN InBev

Heineken

9.4% Efes

SABMiller

Others 13.3%

18.9%

Sources: companies’ data, Business Analytica, Company estimates

Last year the more expensive market segments were developing the most rapidly, especially the licensed beer segment, which grew three times faster than the overall market. The active growth of the licensed segment was caused by continuous changes in beer consumption profile closer to European and worldwide patterns and the transition of domestic consumers to more premium products. This was stimulated by the development of image consumption, disposable income growth and the focus of brewers on innovations in license.

Growth of the leading national brands in the premium and mainstream segments also continued. This resulted from innovations, portfolio development and increasing distribution of brands.

In the packaging segments, one can emphasize strong growth in can and PET packaging. There was also growth of sales in premium bottle.

12 ANNUAL REPORT 2007 BEER MARKET. BALTIKA POSITION

Development of beer market price segments Development of beer market packaging segments

0.3% 0.3% 9.6% 11.4% 6.3% 6.5% 12.7% 13.3% 18.1% 17.4% 39.8% 37.2% 23.4% 23.6% Imported Kegs Licensed Can Premium 48.6% 47.3% Bottle Mainstream 41.2% 43.0% PET Discount & Low mainstream

2006 2007 2006 2007

Source: Business Analytica

BALTIKA IN RUSSIA In 2007 Baltika Breweries being the most valuable consumer sector business in Russia and Eastern Europe continued successful development. Baltika market capitalization reached $8 bln in 2007. Baltika strengthened its leadership on the In conditions of growing competition, the Company continued to strengthen its Russian market leadership, increasing the market share to 37.6% in 2007. This result was achieved thanks to innovations and the successful development of a strong brand portfolio, an effective distribution system and synergy in operational management.

Baltika’s market share growth in Russia

37 37.6 36.3 36.4 33 34.2 32.8 33.0 29

21 2002 2003 2004 2005 2006 2007

Source: Company estimates

BEER MARKET. BALTIKA POSITION 13 BEER MARKET. BALTIKA POSITION

Baltika’s sales volume in 2007 amounted to 44.3 mln hl, including 43.7 mln hl of beer. Growth in the Company’s sales of beer in Russia in 2007 came to 19.3%, while the overall beer market grew by 15.7%. This high performance resulted from development across the entire brand portfolio, but mainly from the flagship Baltika brand, which experienced 33.5% growth due to strong performance of the key sub-brands, Baltika №7 Export, Baltika №3 Classic and Baltika Cooler.

Baltika licensed brands have also shown impressive growth – Tuborg (+70%), Carlsberg (+34%), Foster's (+63%) and Kronenbourg 1664 (+132%). The premium brand Nevskoye and regional brands such as Uralsky Master and Don also showed excellent results.

Beer market and Baltika’s sales growth in Russia, 2000-2007

% 42.7 40 32.0

30 24.3 19.3 20 15.3 21.4 12.3 18.8 8.2 10.6 10 15.7 Baltika beer sales 8.3 11.1 10.1 7.6 6.0 0 Beer market

2000 2001 2002 2003 2004 2005 2006 2007

Sources: Rosstat, Company estimates

BALTIKA ON THE GLOBAL MARKET

2007 was very successful for Baltika in European beer market. The title brand Baltika has been ranked as the second largest brand in Europe. Taking into account the market development and Baltika sales growth trends, the brand is close to take the position №1 in not so remote future.

Leading European brands in 2006 (by sales volume), mln hl

2006 - 10.8 Baltika 2007 - 15.0

Heineken 12.8 Carlsberg 10.1 Stella Artois 9.2 Carling 8.6 Amstel 8.5 Kronenbourg 7.7

Efes 7.5 2006 Foster's 6.7 2007 Beck's 6.4

Tuborg 6.1

Sources: 2006 – Euromonitor, 2007 – Company estimates

14 ANNUAL REPORT 2007 BEER MARKET. BALTIKA POSITION

Еxport of Russian beer abroad is gowing each year. Baltika accounts for more than 70% of all export shipments of Russian beer.

One of the opportunities to increase Baltika sales abroad is licensed production. Starting from April 2007 Baltika №3 is produced in Great Britain under the License Agreement which was signed in Edinburgh. This is the first time ever that a Russian FMCG brand is being produced in Western Europe on a permanent basis. At the end of 2007, Baltika №3 was sold in 1,500 retail sales points in Great Britain, including all the major retail chains such as Tesco, Waitrose and Sainsbury, as well as in 3,000 points of sale in HoReCa (hotels, restaurants and cafes).

The growth in Baltika sales abroad, including sales of products made under license from the Company in Ukraine and Great Britain, amounted to 32.1%. In 2007, Baltika entered new foreign markets – Tanzania, Bahrain, Switzerland, Mexico, North Korea, the Republic of the Congo and the Republic of Cote d’Ivoire – and it resumed shipments of beer to Mongolia. Baltika’s products are now exported to 46 countries around the world. One of the Company’s long-term objectives is to raise the Baltika brand to the leading positions in the world.

By the end of 2007, Baltika’s share of the global market rose from 2.2% to 2.5%. For the sixth time in a row, the Ministry for Economic Development and Trade of the Russian Federation awarded the Company the title of ‘Best Russian Exporter’ for its contribution to the expansion of foreign economic relations and development of export.

Dynamics of Baltika’s global market share, 2000-2007 (by sales volume)

% 2.5 2.5 2.2 1.9 2.0 1.6 1.7 1.5 1.3 1.0

0.5 2000 2001 2002 2003 2004 2005 2006 2007

Souce: Euromonitor

BEER MARKET. BALTIKA POSITION 15 BRAND PORTFOLIO. IMAGE PROJECTS BRAND PORTFOLIO

Baltika brand portfolio with price segmentation

Licensed

Premium

Mainstream

Lower Mainstream

Discount

The Company is the owner of a unique and the strongest brand portfolio which includes around 30 beer and 10 non- beer brands, national and regional, that meets all consumers need states.

Baltika Breweries’ marketing strategy is based on building strong brands with focusing on premium and innovations.

In 2007, the Company kept and strengthened its №1 position in the premium, mainstream, lower mainstream and discount segments and won the top position in the segment of licensed brands, thereby becoming for the first time the absolute leader in all price segments of the Russian beer market.

According to Business Analytica, in 2007 Baltika’s share of the licensed segment grew by 3.7% to reach 26.1% and in Q4 the Company took №1 position in the segment. Such results were possible thanks to substantial growth of the Tuborg brand with a share in the segment advanced by 3.1% and amounted to 17.8% in December 2007, as well as to the excellent growth rates of other licensed brands – Carlsberg, Foster’s and Kronenbourg 1664.

In the premium segment, the greatest contribution to the Company’s success was made by the leader of the segment, Baltika №7 Export beer, which delivered sales growth of 27% compared to the previous year.

BRAND PORTFOLIO 17 BRAND PORTFOLIO

The Company’s market share in the mainstream segment rose by 2.8% to 52.6%. These results were achieved thanks to rapid development of the Baltika Cooler brand – its share rose over the year by 5.1% to 7.6% in the segment, as well as to the increased share held by Baltika №3 Classic, which reached 19.7%.

On the whole, over the year the Baltika brand strengthened its position as №1 on the market, increasing its market share by 1.8% to 12.7%. In 2007, the Baltika brand was recognized for the third time as the most valuable consumer brand in Russia. Its value grew to $2.2 bln, according to estimates by the international consulting company Interbrand Group. The Baltika brand was also included in the list of the biggest world brands, made for the Financial Times by a research company Millward Brown Optimor (МВО). Among the international beer brands, Baltika received the highest rating for the potential and for the brand’s contribution to the Company’s profits.

Baltika’s positions in the lower mainstream segment were strengthened by the leading brand of the segment, Arsenalnoye (with a market share of 19.7% in the segment), as well as by strong regional brands such as Don and Uralsky Master (33% and 42% growth in sales respectively).

In 2007, the Company’s main efforts in innovations were concentrated on the title brand Baltika.

Most of the changes affected the key sub-brands of the line-up: Baltika №3 Classic and Baltika №7 Export beer. After restyling, the updated look maintained continuity with the previous design and underlined the progressive and contemporary nature of the brands. Baltika №3, the best- seller on the Russian market, was brought out in a new embossed bottle, while Baltika №7 was released with a new transparent NLL (no-look label), which was a novelty for Russian beer brands in the premium segment. The same type of bottle design with a transparent label then was used as well for other Baltika premium brands – Baltika №0 Non-alcoholic, Baltika №6 Porter, Baltika №5 Gold and Baltika №8 Wheat beer.

The main innovation of the year was the launch of Baltika №7 Export beer in a fundamentally new packaging – one-litre aluminium can. Baltika became the first and only company in Russia to use such packaging, which has a unique design format even when compared to the innovative European market.

Baltika’s success in the licensed segment was assured by the rapid growth of the Tuborg brand facilitated by expanded distribution on the regional markets, active development of Tuborg Twist and the launch of Tuborg Green in a new one-litre can. A significant contribution also came from the launches of Foster’s in a new bottle and Kronenbourg 1664 in a 0.5-litre aluminium can.

Among the Company’s non-beer brands (the low alcohol beverages Sinebrychoff, Golden Cap, Morsberry and the energy drink Battery), in addition to the successfully developed cocktail Indiana Juice, there was Party-mix malt based cocktail launched in 2007. The cocktail is produced using a novel technology by natural fermentation of malt. Two new varieties were added to the brand line-up: an orange-mango flavour and a peach-passion fruit flavour.

18 ANNUAL REPORT 2007 BRAND PORTFOLIO

Awards

Baltika regularly receives confirmation of the high quality of its products by various awards won at Russian and international competitions, exhibitions and festivals. In the last 10 years, more than 400 of such awards were collected.

In April 2007, silver medals at the Australian International Beer Awards 2007 in the ‘Lager Packaged’ category went to Baltika №7 Export, Baltika №4 Original and Baltika Cooler, while Baltika №6 Porter took the prize in the category ‘Porter Packaged.’

In Finland, Baltika №6 Porter received a silver medal at the tasting competition of the Helsinki Beer Festival in the category ‘Low fermentation beer with alcohol content greater than 6.0% by volume.’

In the autumn of 2007, Baltika №4 Original was awarded a place among the World’s 50 Best Beers at the International Beer Challenge 2007 held in Great Britain. In Germany’s European Beer Star 2007 competition, bronze medals went to Baltika Cooler in the category ‘Mild Beer.’

Four of the Company’s brands – Baltika, Arsenalnoye, Yarpivo and Nevskoye – were simultaneously given places in the list of the ‘50 Best Russian Brands’ published in the January issue of Forbes magazine.

For the ninth time, Baltika №3 Classic beer received the national prize ‘Product of the Year 2007’ in the ‘Beer’ category within the field of consumer goods.

The impressive list of awards confirms the high level of professionalism of the brewers at Baltika.

BRAND PORTFOLIO 19 IMAGE PROJECTS

Baltika Breweries not only produces the most popular Russian beer but gives its consumers a chance to brighten their lives and add a holiday spirit. For this purpose, Baltika conducts the national program ‘Baltika to Russia!’ which includes large-scale festivals and celebrations across the whole country. In 2007, the number of guests visiting circa 100 Baltika events in Russia and abroad amounted to more than two mln people. The festivals help the Company to broaden the circle of loyal consumers, assist in raising the culture of beer sales and consumption in the country and provide people with a pleasant and interesting way to spend their free time.

Main events of the summer – beer festivals In the course of the year, Baltika took part in arranging and spon- soring a multitude of beer festivals in Russia and abroad.

Within Russia, the Company took part in the organisation of beer festivals in St. Petersburg, Moscow, Chelyabinsk, Samara, Khabarovsk, Krasnoyarsk, Tula, Yaroslavl, Voronezh and Rostov-on-Don.

The list of foreign festivals expands from year to year. In 2007, Baltika was present at the beer festival in Atlantic City (USA), the beer festival in Helsinki (Finland), the Belarus ‘Beer Cup’ festival, at ‘Beer Without Borders’ in Tashkent (Uzbekistan), at the international beer festival in Dalian (PRC), at the Berlin beer festival (Germany) and at the beer festival in Athens (Greece).

Music festivals and concerts Sponsorship of music concerts is an important component of image events. Company brands support different types of music which correspond to the preferences of their fans.

The grandiose ‘Baltika Rokot’ festival is held at major venues around the country with support from the Baltika №3 Classic brand and attracts the attention of an audience which traditionally listens to Russian rock. In 2007, ‘Baltika Rokot’ was organized in six Russian cities – Voronezh, Krasnodar, Chelyabinsk, Krasnoyarsk, Vladivostok and St. Petersburg. The program included performances by well known Russian rock groups – Alisa, Splin, Kukryniksy, Smyslovye Gallyutsinatsii, Korol i Shut, Pilot, Agatha Christie, Nochnye Snaipery – as well as new rock groups.

The Chemical Brothers, legendary stars on a worldwide scale, received sponsorship support from the Tuborg brand to give three concerts in Russia (two in Moscow and one in St. Petersburg) which brought together a huge number of fans. Within the Tuborg Greenfest festival the popular worldwide stars Metallica and Linkin Park gave concerts in Moscow and St. Petersburg.

The Company brands provided sponsorship assistance to major Russian music festivals including ‘Prostor’ (Vladivostok, Khabarovsk), ‘Nashi v Gorode’, ‘Chartova Dyuzhina’, ‘Premiya Fuzz’ (St. Petersburg), the Castle Dance festival of electronic music (Moscow, Vyborg, Rostov-on-Don), the large-scale international music project Stereoleto-2007 (St. Petersburg) and others.

At all the events held with participation of Baltika Breweries, cleanliness and the culture of beer consumption are promoted. Thus, at the Ilmen festival of the art song, which every year brings together up to 40,000 participants and was held in July 2007, there was an ‘Ecology Patrol’ during the whole time of the festival. This was all part of the large environmental program called ‘Uralsky Master for Clean Forests!’

20 ANNUAL REPORT 2007 IMAGE PROJECTS

Baltika supports anniversary celebrations of Russian cities City day festivities are not just music events but also favorite city and family celebrations. The Company participates in their organisation and creates unique interactive brand venues at which guests can taste draught beer of different varieties, hear the performances of popular Russian groups and soloists and participate in drawings for prizes and competitions. In 2007, Baltika provided support to City Day events in Magnitogorsk, Krasnoyarsk, Rostov and Tula.

Baltika is the official beer supplier to MAKS-2007

Baltika Breweries regularly participates in the work of the MAKS International Space and Aviation Show in the Moscow suburban town of Zhukovsky, where in 2007 Baltika №7 Export beer was given the status of official beer of the show.

Sporting events Current legislation prohibits beer advertising at sporting events. Nonetheless, as a socially responsible company, Baltika Breweries provides sponsorship support to sports in Russia. In 2007, Baltika sponsored the St. Petersburg Open tennis tournament, one of the most important sporting events not only for the Northern Capital but for all of Russia. The Company also supported the Aurora and Poly- tech football clubs.

Exhibitions and festivals abroad The Company’s products are popular abroad. Baltika has traditionally been a sponsor of the annual Festival of the Russian Winter on Trafalgar Square in London and regularly presents its products at various international exhibitions. In 2007, the Company participated in the following exhibitions: Anuga in Cologne (Germany), Alimentaria Lisboa in Lisbon (Portugal), The Bar Show-2007 in New York (USA), the NBWA’s Trade Show in Las Vegas (USA), Brau Beviale 2007 in Nurem- berg (Germany) and IsraFood in Tel Aviv (Israel), among others.

Baltika breweries are open to visitors Tours are regularly held at all production facilities of Baltika Breweries. Visitors can learn about and see with their own eyes how a modern brewery functions and taste different beer varieties. In the course of 2007, the Company’s brewery premises were visited by more than 60,000 people. Baltika also invites its guests to the unique Krasnoyarsk Museum of the History of Brewing in Siberia, which has the largest exhibition of its kind in Russia.

IMAGE PROJECTS 21 SALES SYSTEM SALES SYSTEM

To improve the effectiveness of sales management, in 2007 Baltika carried out reorganisation of the sales division. The Company adopted the principles of sales management by channels, separated out three directions: sales development, key account management and on-trade sales. The reorganisation also affected the territorial structure: off-trade sales were grouped into six regions which included 33 sales subdivisions and 73 representations.

The formation of a new subdivision – the On-trade Sales Direction – was stipulated by the Russian market development trends with a gradual redistribution of shares of sales between traditional retail and HoReCa segment in favor of the latter. At present the share of HoReCa is not so large – comprising 8-9% of the total sales volume of the beer market, but its leading growth rates over the recent years already now compels Baltika to take steps to enhance the Company’s position in this segment. The high potential of the HoReCa segment in Russia is also proved by the international experience: in the top European countries the segment occupies around half of the market on average.

The introduction of the new sales structure led to increased coverage of points of sale in the HoReCa channel, to the creation of precise vertical hierarchy of communications and to the application of unified Company sales standards across the whole country and facilitates steady growth of Baltika’s competitive advantages on the Russian market.

The Sales Development Direction covers several key areas, including:

development of the strategy for building relationships with distributors, developing retail sales and distribution;

training and development of the employees of sales division;

forecasting and planning sales in the regions.

Baltika has the widest geography of sales in Russia. According to Business Analytica, the Company’s products are available in 98% of the country’s points of sale. Sales of the Company’s products last year were carried out by more than 140 off-trade distributors which have the best logistical resources, opportunities for development and financial stability. The distributors network ensures economic efficiency and optimal deliveries chain.

The most important project to raise the quality of work in the sales department was introduction of a CRM system (Customer Relations Management). Working with CRM opened up new prospects for systematising information about points of sale, planning delivery routes, monitoring and managing the work of sales representatives. Quick information flow between the Company and its distributors detailed down to each SKU and sales point helps Baltika to keep track of the stocks in the warehouses of the partners and to refill them in due time.

Baltika improves the effectiveness of its work with retailers being the leader brewer in terms of the number of refrigerators installed in points of sale and using actively innovative advertising materials and various programmes for the trade. In 2007 Baltika conducted its unified Retail Loyalty Program (RLP), which took in around 40,000 points of sale across all of Russia.

SALES SYSTEM 23 FINANCES. INVESTMENTS FINANCIAL POSITION

Having demonstrated the advantages of the leader on the Russian brewing industry, in 2007 Baltika delivered strong financial results once again – high operating profit and financially stable business on the background of unfavorable raw materials market conditions (world prices for grains and by-products grew by 30-40%) and increased transporta- tion costs. Baltika’s success was facilitated by measures to raise operating efficiency, the development of the leading brands and premiumisation of the portfolio, the increase of sales volumes and market share, as well as the remaining $20 mln synergy effect from the merger of the companies.

Baltika Breweries prepares its financial reports in accordance with several standards of accounting. For the purposes of comparability and transparency of the terms, the Company delivers its financial data prepared on the basis of Inter- national Financial Reporting Standards (IFRS).

Key financial results in 2006-2007 (prepared in accordance with IFRS)

Indicators 2007 2006 Change 2007/2006 Sales, mln hl 44.3 37.2 19.3% Revenue, mln Euro 2,252.9 1,739.5 29.5% Cost of sales, mln Euro (1,079.8) (807.7) 33.7% Gross profit, mln Euro 1,173.2 931.8 25.9% Distribution expenses, mln Euro (560.0) (442.2) 26.6% Administrative expenses, mln Euro (75.8) (62.4) 21.5% Other expenses, mln Euro 0.1 (0.2) Operating profit, mln Euro 537.5 427.1 25.9% Net profit, mln Euro 398.7 330.9 20.5% Operating margin 23.9% 24.6% -0.7p.p. Gross margin 52.1% 53.6% -1.5p.p. ROA 20.7% 18.1% 2.6p.p. ROE 30.5% 21.9% 8.6p.p. ROСE 35.0% 29.7% 5.3p.p. EPS, Euro 2.37 2.03 16.7%

Compared with 2006, the Company’s revenue in 2007 grew by 29.5%. Contributing factors included:

19.3% growth in sales volume; 7.5% average rise in the price of finished goods; focus on the Company’s premium brands.

Among the key projects to cut expenses which were completed in 2007 the following ones can be mentioned:

cross brewing; expansion of production capacity in the regions; increased volume of malt produced within the Company; the agricultural project; optimisation in logistics.

These projects enabled Baltika to reduce the distance and average expense of delivery of finished goods, to procure high quality raw ingredients at lower prices, etc (for more details, see the section on ‘Key Projects’).

FINANCES. INVESTMENTS 25 FINANCIAL POSITION

Factors of operating margin change

24.6% -4.1% +2.8% 23.9% +0.6%

Operating Margin Raw materials and Integration Operational leverage Operating Margin 2006 Distribution and Mix 2007

Intelligent management of assets enabled Baltika to raise the efficiency of capital employed In the course of 2007, just as in the preceding year, the return on Company assets (ROA) grew significantly and amounted to 20.7% (+2.6% compared with 2006). Baltika also delivered improved return on equity, which confirms the growing effectiveness of the use of its own funds. The ROE ratio in 2007 was 30.5% (growth of 8.6%). Another factor in the growth of the ROE ratio besides the basic factor – increase of net profit – was the reduction in the Company’s charter capital at the end of the year.

2007 was notable for increased free cash flow as Baltika received 459.5 mln Euro of cash from its operations. The amount of these funds exceeded the Company’s investment requirements and allowed the Company to pay out dividends to its shareholders, as well as to carry out a buyback of shares for the purpose of growth in profitability per share, enhancing the attractiveness of investing in the Company and improvement in the capital structure.

Baltika invested the temporarily free balances in short term instruments on the financial markets.

In 2007, Baltika demonstrated a considerable growth in return on capital employed ratio (ROCE), which at the end of the period amounted to 35%. The basic factor explaining the growth of ROCE was an increase in the asset turnover, which resulted from the faster pace of growth of revenue from sales compared to rate of growth of assets.

The Company continued to carry on active work to raise efficiency of working management capital and operating activity.

Structure of current assets (w/o cash and financial items)

2006 41% 4% 12% 21% 12% 10%

2007 47% 4% 10% 22% 10% 7%

0% 20% 40% 60% 80% 100%

Raw materials Trade receivables Work in progress Advances to suppliers Finished goods Other receivables

26 ANNUAL REPORT 2007 FINANCIAL POSITION

Year after year Baltika has consistently pursued a policy of raising the Company’s market value and implements projects which ensure reduction of expenses, raising effectiveness of assets employed and the growth in the value of the brands, all of which leads to growth in the Company’s market capitalization and significant growth in the amount of dividends paid out.

Ratio of net profit and accrued dividends for 2000-2007 (in accordance with Russian standards of accounting)

mln RUB 14,000

12,000

10,000 Net profit 8,000 Dividends 61.0% 6,000 60.3%

4,000

44.8% 2,000 46.2% 32.2% 37.8% 18.4% 35.4% 0 2000 2001 2002 2003 2004 2005 2006 2007* * Recommendation of the Board of Directors

INVESTMENTS

In 2007, Baltika Breweries continued to make investments directed at expanding production capacity and purchasing equipment, developing the system of sales and The Company’s distribution, development of Information Technologies and cost cutting. investments in 2007 amounted to 262 mln Euro

Main areas of investment, mln Euro

1% 2% 6%

Expanding production capacity

Development of sales and distribution

Developing IT 55% Purchase of equipment

29% Cost cutting

Miscellaneous

FINANCES. INVESTMENTS 27 KEY PROJECTS KEY PROJECTS

Baltika is increasing production capacity

The Company is striving to be closer to the consumer and is implementing major investment projects to increase its production capacity in regions of growing demand.

The year 2007 marked the successful completion of a project to triple capacity in Samara, while work was begun on doubling production capacity in Voronezh, and construction started on a new brewery in Novosibirsk. Following its modernization and the increase of capacity from 2.0 to 6.5 mln hl per year, Baltika-Samara brewery became one of the largest in Russia and the most modern in Europe. Two new brewing units, 20 holding tanks, 60 cylinder-conical ves- sels and three new filling lines (two PET-lines and one can line) were installed. The construction also affected the entire infrastructure of the brewery: new water treatment facility, cooler- compressor station, boiler and biological purification installa- tions were brought in operation. The own grain elevator was commissioned and new railway spurs were laid down. Special attention was paid to the environmental safety of the enterprise: the existing purification system was modernized and a second line was constructed.

The equipment suppliers to the brewery were major worldwide producers in this field: Huppmann, Ziemann, PALL SeitzSchenk, KHS, Kronos, GEA Tuchenhagen, Buhler, ELGO Berkefeld and Enviro-Chemi, among others. The volume of investment exceeded €101 mln.

The implementation of the project to double production capacity in Voronezh will make it possible to reduce logistics expenses and to satisfy market demand with locally produced beer. The production capacity of the brewery will amount to 2 mln hl in 2008. The volume of investment in the project is more than €18 mln. Within the framework of the investment project, a new PET-line was installed and started up during 2007.

The completion of construction of the brewery in Novosibirsk is planned for the 2008 beer season. The new production is located in a region that is strategically important for Baltika. Its opening will make it possible to reduce the time and average load of delivery across Siberia. The rated capacity of the brewery amounts to 4.5 mln hl per year. The total investment is €134 mln.

KEY PROJECTS 29 KEY PROJECTS

Bringing production of beer closer to the consumer

In 2007, the project to produce the Company’s national brands at all its breweries was actively promoted. Such an organisation of production makes it possible to produce beer closer to the markets of consumption, cut the time of the delivery, and thereby ensure quicker and more flexible distribution of beer to the points of sale.

Agricultural project. Baltika lowers its reliance on external supplies In order to reduce the cost of the basic component of beer, malt, and to be less dependent on changing market conditions and prices, Baltika has been actively developing its own agricultural project involving cultivation of brewing barley.

The project is being implemented in a whole series of Russian regions – Tula, Voronezh, Lipetsk, Kursk, Penza, Ryazan, Tambov and other regions. In 2007, the decision was taken to further extend the agricultural project and to start implementing it in Chelyabinsk region.

In 2007, the farms cooperating with Baltika harvested 150,000 tonnes of barley, which was nearly twice more than in previous year (80,000 tonnes). The barley harvest collected in 2007 constituted 25% of the Company’s needs. The agricultural project has broad possibilities for development, as a unique system of mutually advantageous cooperation has been worked out: the farms have a guaranteed buyer and produce brewing barley of the highest quality under the supervision of the Company’s specialists. For this purpose, Baltika purchases elite varieties of foreign seeds that were especially developed by the leading seed breeding enterprises of Europe, since only the highest quality raw ingredients are used for the Company’s beer production.

Baltika opened a new malt plant

At the beginning of 2007, a new malt plant with a capacity of more than 50,000 tonnes of malt per year was brought on line in Yaroslavl. A major influence on the choice of location for building the malt plant was the successful implementation of the Company’s agricultural project in the Central Federal District of the Russian Federation.

Your Idea Works!

As the leader of the Russian beer industry, Baltika has set for itself the task of developing and continually improving the results and business processes. To solve the task, Baltika has a huge reserve potential – its employees.

Last year a project named ‘Your Idea Works!’ was launched and actively promoted. Baltika employees were invited to send in their suggestions on improving the Company’s work. The project has great importance as a form of mutually advantageous cooperation, allowing everyone to make his contribution to the common cause and influence the final results of Baltika’s work. Any suggestions from staff aimed at making savings, raising productivity and improving quality and efficiency are considered.

During the year, 319 suggestions from employees were made. More than half of them were confirmed by Baltika management and implemented.

30 ANNUAL REPORT 2007 KEY PROJECTS

Increase of management effectiveness with the help of Information Technologies

All of the projects in the field of Information Tech- nologies implemented during 2007 were directed at optimizing working processes, developing various systems of communications and raising the effectiveness of existing technologies. Last year the unification of the Information Systems at all subdivisions of the Company across the entire country was completed. Now all Baltika breweries and sales subdivisions are within a single integrated Enterprise Resource Planning (ERP) system – Monolit – which makes it possible to raise the effectiveness and transparency of business processes, ensure speedy receipt of data needed to manage the Company as a whole and move to a fundamentally new level of interaction among the Company’s subsidiaries, sales subdivisions, regional sales offices and distributors. The corporate information system for managing resources created at Baltika is one of the largest systems in Russia and Eastern Europe in the FMCG sector and has more than 5,000 users. Unique technical solutions unlike anything else in the world went into its creation.

Within the context of introducing the Monolit ERP, the CRM project (for more details, see the section Sales System) continued its development. This is also one of the largest of its kind in Europe and at the end of 2007 more than 4,000 users were connected to the system. This project is constantly being perfected in order to improve information integration with partners and thanks to this help Baltika and its partners can work in a single, unified information space.

There was also the successful project to launch data processing centres which ensure reliable storage and confi- dentiality of data at all of the Company’s subsidiaries.

Optimization in logistics In 2007, Baltika implemented projects directed at cost cutting in logistics, including:

a project to improve the Company’s supply chain so as to reduce expenses for delivery and storage;

a project to manage product stocks at the warehouses of distributors, making it possible to evaluate the sales volumes in real time, to quickly top up product reserves on the basis of current requirements of the market and to modify production plans in a timely way;

a project to automate finished goods warehouses – in 2007 the warehouses in Krasnoyarsk, St. Petersburg and Tula were automated.

KEY PROJECTS 31 SOCIAL RESPONSIBILITY SOCIAL RESPONSIBILITY

Effective and sustainable development of business enables Baltika to pay taxes to the budgets at all levels of government fully and timely, to invest in the development of related sectors of the Russian economy, to support socially important projects, to develop ecological programs and to provide social guarantees to the employees.

Baltika takes responsibility to consumers for the high quality of its products, to the employees for favorable working conditions, to society for respecting its values, norms and rules, as well as for conducting business in a conscientious manner.

TAXES Over the course of the last 10 years Baltika Breweries has been figured among the top three taxpayers in St. Petersburg in terms of payments maid to the regional budget. In a number of regions where the Company’s breweries are located, Baltika is also the largest local taxpayer.

In 2007 the Company’s tax payments to the federal budget of Russian Federation amounted to more than 7 bln rubles, while around 13 bln rubles were paid to the regional budgets, the amounts in total were 3 bln rubles greater than in 2006.

PRESERVING THE ENVIRONMENT Having modern production facilities across the whole country, Baltika devotes great attention to the environment in the regions where its breweries are located and sets the highest requirements for ecologically safe production.

In 2007 Baltika implemented ecological projects along three lines: eliminating emissions into the atmosphere, water protection by building and modernizing purification equipment and waste treatment improvement.

Together with public ecological organisations and on its own, Baltika carries out ecological campaigns on provision of cities areas.

All of the Company’s breweries have the most modern equipment and automated management systems installed, ensuring high technology production, rational use of resources and environmental safety.

CHARITY In 2007 Baltika spent over 180 mln rubles on socially important projects and charity. The main principle guiding the Company’s charitable activities is targeted assistance to institutions involved in health care, education, protection of the disadvantaged, support for children’s and youth sports, as well as support for veterans. Priority is given to socially significant projects where expenditure of funds is monitored with the participation of the authorities. One of the main areas has been Baltika assistance to implement the national project ‘Health.’

In 2007, Baltika financed complete renovation of the Children’s Polyclinic №63, the Orphanage №5 and construction of vertebral surgery department in the Turner Research Institute of Children’s Or- thopedics in St. Petersburg. The latter was opened during a solemn ceremony on the 75th anniversary of the Turner Institute, June 29, 2007, in the presence of the Company and the St. Petersburg Administration representatives.

SOCIAL RESPONSIBILITY 33 SOCIAL RESPONSIBILITY

Baltika also continues to provide financial assistance to the Orphanage №8, the children’s hospice in St. Petersburg, the rehabilitation centre ‘House of Hope on the Hill’ in Leningrad region, the region children’s cardio-rheumatology sanatorium ‘Orlenok’ and to the kindergarten №99 in Tula, as well as to the special boarding school №9 for children with illnesses of the musculoskeletal system, the Pavlovsky specialized children’s home and the Talovskaya Boarding School for orphans in Voronezh. In Chelyabinsk, Baltika was able to improve the living conditions of orphans by its material contribution to the reconstruction of boarding school №13. In Khabarovsk, New Year’s gifts from Baltika were given out to youngsters living in the children’s home in the village of Topolevo and to adolescents under the care of the Centre of Psychological and Pedagogical Rehabilitation. In Krasnoyarsk, Baltika allocated funds for the ‘Rodnik’ shelter and for the ‘Miloserdie’ charitable canteen.

A RESPONSIBLE EMPLOYER One of the Company’s main values is its employees. That is precisely why Baltika devotes special attention to the implementation of a social policy developed from best practices of the four companies which entered into the merged Baltika company.

Worthy wages that are paid on time, prospects for professional and career growth, social protection, open communication lines within the Company – Baltika ensures all of this for its employees.

System of compensation and benefits The wages paid at Baltika are among the highest in the sector, which makes it possible to compensate working employees in a worthy manner and to attract new highly qualified personnel. Baltika provides its staff with a social package which includes an extensive list of benefits and privileges: voluntary medical insurance; life insurance and accident insurance; free meals in the Company’s own canteens; material support for wedding, birth of children, jubilee or retirement; supplemental payments on sickness and business travel.

Training Diverse internal and external educational programs which the Company has implemented using the best teaching technologies enable Baltika employees to obtain new knowledge in a timely manner and to develop their professional skills.

In 2007, the Corporate Training Centre organized more than 450 seminars and training sessions in Russia and abroad for more than 3,000 Company employees.

Baltika employees were also offered an opportunity to conduct training themselves, thereby creating additional conditions for raising the potential of employees and developing corporate culture. In 2007, more than 180 people studied at in-house training programs conducted by their colleagues.

In order to get acquainted with modern trends in business development and best practices, Baltika specialists regularly participate in professional con- ferences and forums.

34 ANNUAL REPORT 2007 SOCIAL RESPONSIBILITY

Appraisal of personnel Annual Performance Appraisal (EOD, in Russian) is one of the up-to-date tools in the sphere of managing personnel. In 2007, the EOD system was actively developed, making it possible to gather information about work results and the level of competences of each employee, to evaluate the potential of Company personnel, to put together a multifaceted plan for employee development that will be a priority element in the business.

Internal communications In order to develop internal communications and to create tools for providing and receiving feedback, the corporate Intranet portal ‘Dialogue’ was opend, where Baltika employees can receive useful information and also can tell about their achievements or discuss problems with colleagues in other departments and regions. Company news is published in the monthly corporate newspaper My BALTIKA, which, ever since 2007, appears with regional supplements. There are regular meetings in the Company between top managers and key employees, each of whom can pose questions for the management.

In 2007, the Code of Corporate Culture was prepared and implemented. The adoption of the Code was an emblematic event for the Company and exerts a positive influence on development of interpersonal relations in the Baltika team.

Recreation and sport The Company’s breweries are equipped with modern sports and health club complexes and gyms which are free of charge for the employees.

In many regions, Baltika rents sports halls for employees to engage in competitive sports and it conducts corporate champion- ships among the breweries. Thus, for example, ever since 2005 teams of the Company’s subsidiaries have competed for the Baltika Cup in mini-football.

During the winter and summer school vacations, the Company offers special passes for the children of employees to go to the children’s health camp ‘Baltika,’ which is located in the Lenin- grad region, and to children’s health camps in those regions where the Company breweries are.

PARTICIPATION IN THE WORK OF THE UNION OF RUSSIAN BREWERS On April 5, 2007, the Board of the Union of Manufacturers of Beer and Non-alcoholic Products (Union of Russian Brewers) elected the Company’s President, Anton Artemiev, as Chairman of the Board for 2007-2009.

On the basis of 2006 results, Baltika was awarded the highest prize in the Union, the ‘Amber Star,’ in the nomination ‘For the successful development of business reputation,’ while Company employees were given beer industry awards of the Union – ‘Best specialist of the brewing industry’ medals and the ‘Order of merit for the brewing industry development.’

Each year Baltika joins the Union of Russian Brewers in running an ‘After 18’ campaign aimed at preventing sales of beer to minors. In 2007, Baltika, together with representatives of public organisations and the mass media, arranged the distribution of around 150,000 stickers with the slogan ‘After 18. Sales of beer to minors are prohibited!’ at sales outlets in Khabarovsk, Rostov-on-Don, Novosibirsk and St. Petersburg.

The ‘After 18’ sign was developed at the initiative of the Union of Russian Brewers and reflects the position of the brewing industry aimed at support of responsible beer consumption.

SOCIAL RESPONSIBILITY 35 CORPORATE GOVERNANCE CORPORATE GOVERNANCE

THE PRINCIPLES OF CORPORATE GOVERNANCE

Building on the best traditions of Russian and world corporate governance, Baltika is striving to grow the value of the Company while pursuing the following principles:

defending the rights and lawful interests of shareholders and investors;

practicing transparency and openness with information;

monitoring and evaluating the quality of business management.

When improving the system of corporate governance, Baltika is guided by the Code of Corporate Conduct approved by the federal body of the executive branch of government responsible for the securities market, setting for itself the following priorities:

the practice of corporate governance adopted by the Company ensures equal treatment of all shareholders owning the same number of shares of a given type (category). All shareholders have the opportunity to receive effective defence in case their rights are violated;

Baltika shareholders are protected by reliable and effective means of registering rights to shares;

shareholders have the right to participate in the management of the Company by taking decisions on the most important issues of its activity at the general shareholders meeting;

shareholders have the right to receive regular, timely, full and reliable information about the Company;

shareholders do not abuse the rights conferred on them;

within the Company the use of confidential and business information is controlled.

The principles of corporate governance are set down in the following internal Baltika documents:

Articles of Association (new edition was approved by decision of the General Shareholders Meeting on 15.05.2007, Minutes №23 dated 21.05.2007);

Regulations on the Management and Control Bodies (new edition approved by the general shareholders meeting on 15.05.2007, Minutes №23 dated 21.05.2007);

Regulations on the Audit Committee of the Board of Directors (approved by the Board of Directors, decision dated 06.09.2006, unnumbered Minutes);

Regulations on the Appointment and Remuneration Committee of the Board of Directors (approved by the Board of Directors on 27.03.2007, Minutes №5);

Regulations on Insider Information (approved by the Board of Directors, decision dated 27.03.2007, Minutes №5);

Regulations on Internal Control and Audit of Financial and Business Activities (approved by the Board of Directors, decision dated 19.09.2007, Minutes №13).

CORPORATE GOVERNANCE 37 CORPORATE GOVERNANCE

MANAGEMENT BODIES

In accordance with its Articles of Association, the Company has the following management bodies:

1. Shareholders Meeting 2. Board of Directors 3. President

1. Shareholders Meeting

The General Shareholders Meeting is the Company’s highest management body. The competence of a shareholders meeting comprises resolving issues specified in the Articles of Association.

In 2007, the Company held two General Shareholders Meetings: the traditional annual meeting and an extraordinary meeting held in the form of an absentee ballot.

On May 15, 2007 the Annual General Shareholders Meeting (AGM) was held and the following were approved: the annual report, the statement of profit and loss for the financial year, the distribution of 2006 profits, the payment of dividends in the amount of 39 rubles 50 kopeks for each ordinary Baltika’s share and for each type ‘A’ preference share.

The AGM elected the Board of Directors and the Internal Auditing Committee, and approved the Company’s outside auditors: A&P Audit CJSC, ZAO KPMG and Ernst & Young Ltd.

The AGM also approved the new edition of the Company Articles of Association and its Regulations on the Management and Control Bodies of Baltika Breweries.

On October 15, 2007 an Extraordinary General Shareholders Meeting in the form of an absentee voting was held. The shareholders approved the decision to reduce the charter capital of Baltika Breweries by buying back a part of the shares in order to decrease their total number.

2. Board of Directors

The activity of the Board of Directors is directed at the Baltika strategic management and adoption of effective managerial decisions corresponding to the best norms of corporate governance.

The main tasks of the Board of Directors are:

to form an effective management system;

to ensure the steady financial situation;

to determine the most promising and priority directions for activities;

to develop and implement the strategic objectives.

Baltika’s Board of Directors consists of seven members, two of whom are independent directors.

38 ANNUAL REPORT 2007 CORPORATE GOVERNANCE

Chairman of the Board of Directors

John Nicolson Born: 1953 Education: higher Member of Baltika’s Board of Directors since 2005 Occupies posts in the following organisations: Director, Scottish & Newcastle Plc. Member of the Board of Directors of Baltic Beverages Holding AB

Members of the Board of Directors

Anton Artemiev Alexander Ikonnikov Alexander Izosimov independent director independent director Born: 1960 Education: higher Born: 1971 Born: 1964 Member of Baltika’s Education: higher Education: higher Board of Directors since 2001 Member of Baltika’s Member of Baltika’s Occupies posts in the following Board of Directors since 2005 Board of Directors since 2005 organisations: Occupies posts in the following Occupies posts in the following President of Baltika Breweries organisations: organisations: Member of the Board of Chairman of the Board of Directors General Director, Vympelcom OJSC Directors of Maulterie Soufflet of the Association of Independent Member of the Board of Directors, Saint-Petersburg Corporate Directors, United Confectioneries B.V. General Director, Board Solutions CJSC Member of the Board of Directors, Member of the Board of Directors, Limnotex Development Ltd National Depository Centre, Member of the Board of Directors, East Capital Explorer Plc.

Jørgen Buhl Rasmussen Bjørn Søndenskov Andrew Stevenson Born: 1955 Born: 1962 Born: 1957 Education: higher Education: higher Education: higher Member of Baltika’s Member of Baltika’s Member of Baltika’s Board of Directors since 2006 Board of Directors since 2006 Board of Directors since 2006 Occupies posts in the following Occupies posts in the following Occupies posts in the following organisations: organisations: organisations: President, Carlsberg Breweries A/S Vice President, Carlsberg Breweries A/S Development Director, Member of the Board of Directors, Member of the Board of Directors, Scottish & Newcastle Plc. Baltic Beverages Holding AB Baltic Beverages Holding AB Member of the Board of Directors, Baltic Beverages Holding AB

The following changes in the composition of the Company’s Board of Directors were made in the course of the reporting period: on September 19, 2007 John Nicolson was appointed Chairman of the Board of Directors; prior to this date, Jorgen Buhl Rasmussen was Chairman of the Board of Directors.

CORPORATE GOVERNANCE 39 CORPORATE GOVERNANCE

Two committees have been formed and function within the Company’s Board of Directors: Audit Committee; Appointment and Remuneration Committee.

Audit Committee of the Board of Directors The objective of the Committee is to raise the effectiveness and the quality of the work of the Board of Directors so as to ensure open communications with the outside auditors, the Internal Auditing Committee, the structural subdivisions of the financial reporting and the economic-financial group by preliminary review and preparation of recommendations to the Board of Directors on matters within Committee’s competence relating to the following issues:

risks associated with the Company’s work; management reporting; financial reporting; outside independent audit, internal audit; procedures for internal control.

Personal composition of the Audit Committee:

Name / year of birth / education Position held

Alexander Ikonnikov Chairman, Audit Committee Born: 1971 Member, Board of Directors, Baltika Breweries Education: higher

Vibeke Aggerholm Vice President, Internal Audit Born: 1964 Carlsberg Breweries A/S Education: higher

Steven Wheatherley Head of Internal Audit Born: 1968 Scottish & Newcastle Plc. Education: higher

Charles Eriksson President Born: 1948 Baltic Beverages Holding AB Education: higher

The basic document governing the activity of the Audit Committee of the Company’s Board of Directors and determining the issues within its competence, as well as the method of forming its composition and functioning, is the Regulations on the Audit Committee.

40 ANNUAL REPORT 2007 CORPORATE GOVERNANCE

Appointment and Remuneration Committee of the Board of Directors The main reason for creating the Committee and the sphere of its activity is to help attract to the Company’s management qualified specialists and to provide them with incentives to work successfully.

Personal composition of Appointment and Remuneration Committee:

Name / year of birth / education Positions held

Jorgen Buhl Rasmussen Chairman, Appointment and Remuneration Committee, Born: 1955 Member of the Board of Directors Education: higher Baltika Breweries

Alexander Izosimov Member of the Board of Directors Born: 1964 Baltika Breweries Education: higher

Andrew Stevenson Member of the Board of Directors Born: 1957 Baltika Breweries Education: higher

During 2007, there were 17 sessions of the Company’s Board of Directors, both face to face meetings and meetings in the form of absentee balloting.

3. Executive body

The sole executive body of the Company is the President, who directs the Company’s ongoing activities.

Since 2005, Anton Artemiev has been the President of Baltika Breweries.

Criteria for determination and the amount of compensation (including reimbursement of expenses) paid to members of the Board of Directors and executive body of the Company

In accordance with paragraph 2, article 64 of the law ‘On Joint-stock Companies,’ on May 15, 2007 the Annual General Shareholders Meeting determined the maximum compensation paid to independent members of the Board of Directors at the same level as the year before, $130,000. The maximum amount of reimbursable expenses relating to the performance of their functions by members of the Board of Directors was set at the equivalent of $7,000.

In the course of 2007, the independent members of the Board of Directors were paid compensation in the amount of 2,774,055 rubles (not counting taxes).

In accordance with paragraph 3, article 69 of the law ‘On Joint-Stock Companies,’ the rights and obligations of the Company’s President are governed by that law, as well as by the contract concluded between the President and the Company. The amount of compensation for performance of the functions of the Executive body, as well as other working conditions of work, is governed by a labour contract which the President has signed with the Company.

CORPORATE GOVERNANCE 41 CORPORATE GOVERNANCE

BALTIKA MANAGEMENT

Alexander Ekaterina Anton Daniil Nils Jørgen Marcho Stefanov Dedegkaev Azimina Artemiev Briman Sehested Kuyumdzhiev

Vice-President Vice-President President Vice-President Vice-President Vice-President Supply Chain Finance and HR & Corporate Sales in Russia Marketing Economics Affairs

42 ANNUAL REPORT 2007 CORPORATE GOVERNANCE

Internal Auditing Committee The Internal Auditing Committee is a permanently functioning elected body created in keeping with current legislation and the Company Articles of Association. It performs periodic control of the Company’s financial and economic activity, the activity of its management bodies and officials (including its separate subdivisions, departments, branches and representative offices) by means of the following verifications:

legality, economic justification and effectiveness (expediency) of the economic and financial operations done in the period under examination;

completeness and accuracy in the way the economic and financial operations are reflected in the Baltika’s management documents;

legality, economic justification and effectiveness (expediency) of the actions of officials in the Company’s management bodies and directors of its structural subdivisions in satisfying current legislation, the Company Articles of Association, approved plans, programmes and other internal Baltika documents.

The Internal Auditing Committee consists of three persons elected at the Annual General Shareholders Meeting. Members of the Internal Auditing Committee cannot at the same time be members of the Board of Directors or occupy other positions in the Company’s management bodies.

At the Annual General Shareholders Meeting on May 15, 2007, the members of the Internal Auditing Committee were elected:

Name / year of birth / education Position held

Vibeke Aggerholm Vice President, Internal Audit Born: 1964 Carlsberg Breweries A/S Edudation: higher

Steven Wheatherley Head of Internal Audit Born: 1968 Scottish & Newcastle Plc. Education: higher

Nadezhda Bazilevich Finance Manager Born: 1975 Baltic Beverages Holding АВ Education: higher

INFORMATION DISCLOSURE The Company’s information policy is based on principles of transparency and openness.

In accordance with the requirements of the Regulation on Disclosure of Information by Issuers of Securities approved by the Federal Service for Financial Markets of Russia, the Company discloses information about its activities as required of joint-stock companies, including information about the stages of the procedure of issuing securities, information in the form of prospectuses for securities, quarterly reports of the issuer of securities and statements containing essential facts (events, actions) affecting the financial and economic activity of an issuer of securities.

Official information about Baltika’s activities is published in the newspaper Izvestiya as well as on the Interfax news line. Complete information about the Company’s activities is disclosed on the Company’s official internet portal www.baltika.ru. Additionally, on a quarterly basis, Baltika publishes reports on its financial and economic activities according to International Financial Reporting Standards (IFRS). In 2007, the Company fulfilled all the legally established requirements on disclosure of information. Interested party and major transactions In the course of 2007, Baltika completed 41 interested party transactions. There were no major transactions in the sense described by the law of Russian Federation and the Company Articles of Association. A complete list of interested party transactions is provided in the section entitled ‘Interested Party Transactions.’

CORPORATE GOVERNANCE 43 CORPORATE GOVERNANCE

RISK MANAGEMENT

In 2007, steady and favorable changes in the macroeconomic situation in Russia continued. The stable political system, rational monetary policy, improved legislation, growth of income among the population, all these factors make it possible to say that shareholders investments into the Company are becoming less exposed to risk of unpredictable changes in state regulation governing private business activities.

In 2007, as part of the process to improve corporate governance, Baltika started a project to introduce a multifaceted system of risk management.

Implementation of this project will enable Baltika:

to uncover potential risks which might negatively influence the achievement of Company objectives;

to evaluate the degree of influence of potential risks and take measures in a timely manner to eliminate or minimise them;

to raise the effectiveness of the decisions taken by management;

to get optimal results from resources;

to put together a reliable system of control.

The project was elaborated under the guidance of the Audit Committee. The whole management of the Company was drawn into the process. Evaluation was carried out along all existing areas of activity and fields where risk arise (political, economic, natural, production-related, man-caused, ecological, informational, financial and others). As a result, in 2007 a map of risks taking into account their evaluation and prioritisation was compiled. A list of measures for managing and reducing risks was also developed.

Financial risks

Notwithstanding the positive trend in the Russian economy, Baltika continues to devote attention to managing financial risks: interest rates, currency exchange rates, credit and liquidity.

To minimise exchange rate risks, Baltika constantly increases the share of contracts drawn up in the national currency. The Company tries to cover currency risk arising from the conclusion of contracts to import basic raw materials and equipment through the constantly rising volume of export sales denominated in foreign currency.

As previously, diversification of credit risks remains one of the Company’s important tasks within the context of managing financial risks. For this purpose, Baltika cooperates with the largest Russian and foreign banks, uses credit lines offering it the possibility to choose the currency and periods of each separate borrowing, and combines sources with fixed and ‘floating’ interest rates.

In order to better manage financial risks, the Company regularly does forecasting on the short-term and long-term outlook, and it develops a system of budgeting and modeling, while improving the principles used to manage working capital.

44 ANNUAL REPORT 2007 CORPORATE GOVERNANCE

Industrial and country risks

The main risk factors which can negatively influence development of brewing industry are:

toughening of the state policy limiting advertising and consumption and sale of beer in public places;

instability of the current tax legislation and toughening of tax administration;

growth of the market for substitute goods (low-alcohol cocktails and wine);

the volume of beer consumed approaches the level of the saturated European markets and, in consequence, there is a slowdown in the rate of growth of the Russian beer market;

action by the natural monopolies in the field of adjusting rates and limiting access to their capacities (for example, thermal and electric power, railway freight transport);

growth in prices for basic raw materials as a result of worldwide trends;

increasing competitive struggle on the market generally and in separate segments.

In order to strengthen its position in the sector and to reduce the influence of sector risks, Baltika is undertaking a complex of measures, including notably the following: optimising of margins and managing production costs, implementing a corporate marketing strategy focused on strong brands, the premium and innovations, developing and bringing to market new kinds of products, improving the system of distribution and promotional channels, further expansion of the geography of sales and developing related business areas, raising the efficiency of business processes and operational excellence. Risks from operations

The system for managing risks related to the Company’s operational activities is a complex of policies and procedures making it possible to monitor and level out operating risks. Regular updating of procedures facilitates quick changes to the system of internal control in accordance with changes in the business processes.

CORPORATE GOVERNANCE 45 SECURITIES SECURITIES

CHARTER CAPITAL

As of January 11, 2008*, the Company’s charter capital stood at 164,041,164 rubles.

Authorised and issued shares

Forms of shares Number of shares Nominal value, rubles

1. Issued shares Ordinary registered shares 151,714,594 1 Preference type ‘A’ registered shares 12,326,570 1 2. Authorised shares Ordinary registered shares 3,808,291 1 Preference type ‘A’ registered shares 440,450 1

Share issues

The following issues of shares are in circulation:

Registration Type of shares Number Nominal value Nominal value number of shares in the of the issue, of one share, issue rubles rubles

1-04-00265-А Ordinary registered shares 151,714,594 151,714,594 1

2-04-00265-А Type ‘A’ registered preference shares 12,326,570 12,326,570 1

DISTRIBUTION OF THE CHARTER CAPITAL The Company’s largest shareholder and the owner with controlling interest is Baltic Beverages Holding AB (BBH). BBH’s share in the Company’s charter capital amounts to 85.54%.

The structure of the Company’s charter capital as of January 11, 2008

Legal entities and nominal holders 6.26%

Individuals 8.20%

Baltic Beverages Holding AB 85.54%

The overall number of the registered shareholders as of January 11, 2008 was 2,708.

* The data given takes into account the purchase and cancellation of shares in accordance with the resolution of the Extraordinary General Shareholders Meeting of October 15, 2007 regarding reduction of the Company’s charter capital by buying back a part of the shares in order to decrease their total number

SECURITIES 47 SECURITIES

Market Capitalisation In terms of market capitalisation, Baltika Breweries is the largest FMCG company in Russia. In 2007, the Company’s market capitalisation grew by 10% compared to the preceding year and reached $8 bln. Over the course of the past several years, Baltika shares (both ordinary and preference shares) have been traded on stock exchanges and over-the-counter markets. The Company’s shares passed through the procedure of listing and were quoted on the two stock exchanges of the country – the Moscow Interbank Currency Exchange (MICEX, since 2003) and the Russian Trading System (RTS, since 2001). At present the Company’s shares are traded on the stock exchanges in the ‘List of securities allowed to be traded but not included in the quotation lists.’

PERFORMANCE OF BALTIKA SHARES IN 2007

Trend lines of price changes in Company shares during 2007 (MICEX)

Rubles

1,400

1,300

1,200

1,100

1,000

900

800

700 29.12.2006 12.01.2007 26.01.2007 09.02.2006 23.02.2006 09.03.2006 23.03.2006 06.04.2007 20.04.2007 04.05.2007 18.05.2007 01.06.2007 15.06.2007 29.06.2007 13.07.2007 27.07.2007 10.08.2007 24.08.2007 07.09.2007 21.09.2007 05.10.2007 19.10.2007 02.11.2007 16.11.2007 30.11.2007 14.12.2007 28.12.2007 13.07.2007 27.07.2007

Ordinary shares Preference shares

Growth of prices in share transactions during 2007 on the main trading platform – MICEX

Q1 H1 9 Months Year

Ordinary shares +10.9% +3.1% +1.4% +3.1% Preference shares +13.4% +2.1% +1.2% +6.9%

Statistics on Baltika shares trading in 2007 (MICEX)

Price per share in Price of last Volume of Number of 2007 transaction, trading, transactions min./max., rubles rubles rubles Ordinary shares (PKBA) 852 / 1,330 1,205 658,874,223 12,388

Preference shares (PKBAP) 727 / 1,040 839 409,642,896 4,186

48 ANNUAL REPORT 2007 SECURITIES

BONDS In order to create a public credit history on the debt market, in 2004 the Company made its first bond issue.

On November 20, 2007, Baltika redeemed the first bond issue.

Bonds with a total nominal value of 1 bln rubles were initially placed on October 26, 2004. The period of circulation of the issue amounted to 3 years Baltika redeemed (1,120 days). Provision was made for paying out seven bond coupons. The the first bond issue first coupon period was equal to 28 days, and the amount of the first coupon was 4.00% annual interest. All the following coupon periods were semiannual with a coupon rate of 8.75% interest per annum.

The primary (technical) placement of the bonds was in the form of a closed subscription in favour of Raiffeisen- bank Austria CJSC.

The secondary placement of bonds among investors took place on November 23, 2004 on MICEX. This was the first time that the Company distributed bonds among investors on the Russian bond market at the issuer’s discretion – by allocation – a widely practiced principle in Western financial markets. The unique structure of the loan made it possible to relieve investors of the risk of change in interest rates between the period of the initial placement and registration of the results of the issue: the securities were offered to investors only on the secondary market. As a result, the Company received a better price for the placement and ensured that the loan enjoyed high liquidity and wide distribution. The average weighted income from the secondary placement amounted to 8.99% annual interest to payback. The general demand for the Baltika Breweries bonds exceeded the size of the issue by more than three times and amounted to 3.1 bln rubles.

The organiser and underwriter of the bond issue was Raiffeisenbank Austria, CJSC. The co-organisers of the issue were: ABN AMRO Bank, Evrofinans-Mosnarbank, Promyshlenno-stroitelny Bank of St. Petersburg (since July 2007, Bank VTB Severo-Zapad, OJSC), and Troyka Dialog investment company.

The funds received from placement of the Bonds were used by the Company to finance its activities and implement investment projects.

Pay-out of coupons on the first bond issue during 2007

Coupon Annual interest rate of the coupon, % Date of payment 6th coupon 8.75 22.05.2007 7th coupon 8.75 20.11.2007

According to data from the National Depository Centre (NDC), during the period January-November 2007 the average turnover per month of Baltika Breweries bonds amounted to 1,316 mln rubles, of which around 98% was done on the stock exchange.

SECURITIES 49 SECURITIES

Yield curve on Baltika bonds in 2007

4 09.01.2007 23.01.2007 06.02.2007 20.03.2007 03.04.2007 17.04.2007 01.05.2007 15.05.2007 29.05.2007 12.06.2007 26.06.2007 10.07.2007 24.07.2007 07.08.2007 21.08.2007 04.09.2007 18.09.2007 02.10.2007 16.10.2007 30.10.2007

Source: Reuters

DIVIDENDS POLICY

The Company’s policy on dividends is based on the principle of fair distribution of profit among all its shareholders in proportion to the number of shares they own in a given share category, taking into account a rational correlation of the amount paid in dividends and the funds needed to carry out the strategic plans for the Company’s development.

Baltika seeks to steadily increase the amount of money allocated to pay dividends to shareholders. The amount of the dividend on preference shares cannot be lower than as determined in the Company Articles of Association.

In recent years, the amount of dividends paid per share has constantly grown. Thus, the dividend per ordinary share paid out for 2006 was more than 12 times greater than what was paid out for the year 2000, while the dividend per preference share was 9.6 times greater.

In the last two years, Baltika has held to a policy of paying equal divided on both ordinary and preference shares: 24.33 rubles per share for 2005 results and 39.5 rubles per share for 2006. On the basis of 2006 performance, the amount of the dividend grew substantially compared to the preceding year, namely by 1.62 times.

Indices of the dividends paid out on Baltika shares

Period for which the Amount of dividend per Amount of dividend per Change in the amount of Change in the amount of dividend is paid ordinary share, preference share, dividend per ordinary share dividend per preference share rubles rubles (as % of 2000 payment) (as % of 2000 payment) 2000* 3.16 4.11 100 100 2001* 8.50 11.00 269 268 2002 9.32 12.12 295 295 2003 11.64 15.13 368 368 2004 13.94 18.12 441 441 2005 24.33 24.33 770 592 2006 39.50 39.50 1,250 961 2007** 52.00 52.00 1,646 1,265

* The amount of the dividend per share is shown taking into account the Company’s share split, as a result of which each of the Company’s ordinary and preference shares with nominal value of 80 rubles was converted into 80 shares of the same category (type) with a nominal value of 1 ruble each. ** Recommendations of the Board of Directors

50 ANNUAL REPORT 2007 SECURITIES

Report on the pay-out of allocated dividends on Company shares

The amounts of dividends allocated for payment in 2007 were as follows: on ordinary registered Baltika shares – 6,377,595,898 rubles on preference type ‘A’ registered Baltika shares – 534,834,542.5 rubles The amount of dividends allocated for payment was approximately 2 times greater than in 2006. At the end of 2007, more than 97% of the allocated dividends were in fact paid out to shareholders.

REDUCTION OF CHARTER CAPITAL BY BUYING BACK A PART OF THE SHARES

On October 15, 2007, at the Extraordinary General Shareholders Meeting held in the form of absentee voting, the decision was approved to reduce the charter capital of Baltika Breweries by buying back a part of the shares in order to decrease their total number. The purchase of ordinary and preference shares of type ‘A’ from all shareholders willing to participate was done in accordance with legislation of Russian Federation and on the terms and conditions approved by the Board of Directors. The reduction of the Company’s charter capital by buying back the shares was directed at: growing the profitability per share, thus enhancing the attractiveness of investing in Baltika Breweries; improving in the Capital structure; shareholders’ ability to sell their shares at a rate without having to pay expenses to intermediaries, brokers and stock exchange services, commissions and other expenses related to the sale of securities. Baltika purchased 9,828,550 ordinary shares and 1,213,545 preference shares of type ‘A’. In accordance with existing legislation, the shares purchased by the Company were cancelled and the charter capital was reduced by the amount of the nominal value of the purchased (cancelled) shares.

SECURITIES 51 OAO Baltika Breweries and subsidiaries Notes to the Consolidated Financial Statements for the year ended 31 December 2007 OAO Baltika Breweries and subsidiaries CONSOLIDATED FINANCIAL STATEMENTS for the year ended 31 December 2007 CONTENTS

INDEPENDENT AUDITORS’ REPORT 54

CONSOLIDATED INCOME STATEMENT 55

CONSOLIDATED BALANCE SHEET 56

CONSOLIDATED STATEMENT OF CASH FLOWS 57

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY 59

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 60

53 ZAO KPMG Ernst & Young LLC Moskovsky pr.19, Level 4 Malaya Morskaya Street, 23A St. Petersburg 190005, St. Petersburg 190000, Russia Russia

INDEPENDENT AUDITORS’ REPORT

To the Board of Directors OAO Baltika Breweries

Report on the Consolidated Financial Statements We have audited the accompanying consolidated financial statements of OAO Baltika Breweries (the ‘Company’) and its subsidiaries (the ‘Group’), which comprise the consolidated balance sheet as at 31 December 2007, and the consolidated income statement, consolidated statement of changes in equity and consolidated cash flow statement for the year then ended, and a summary of significant accounting policies and other explanatory notes.

Management’s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with International Financial Reporting Standards. This responsibility includes: designing, implementing and maintaining internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatements, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances.

Auditors’ Responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with International Standards on Auditing. Those standards require that we comply with relevant ethical requirements and plan and perform the audit to obtain reasonable assurance whether the financial statements are free of material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting principles used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

Opinion In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Group as at 31 December 2007, and its consolidated financial performance and its consolidated cash flows for the year then ended in accordance with International Financial Reporting Standards.

ZAO KPMG, a company Ernst & Young LLC incorporated under Laws of the St. Petersburg Russian Federation and a member 19 February 2008 firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative St. Petersburg 19 February 2008

54 OAO Baltika Breweries and subsidiaries Consolidated Income Statement for the year ended 31 December 2007

Note 2007 2006 ’000 EURO ’000 EURO Revenue 2,252,929 1,739,477 Cost of sales (1,079,761) (807,665) Gross profit 1,173,168 931,812 Distribution expenses (559,985) (442,215) Administrative expenses 8 (75,775) (62,387) Other income/(expenses), net 9 103 (158) Financial income 11 27,832 34,385 Financial expenses 11 (18,875) (19,761) Share of profit of associates 458 97 Profit before income tax 546,926 441,773 Income tax expense 12 (148,250) (103,324) Profit for the year 398,676 338,449 Attributable to: Shareholders of the Company 398,676 330,872 Minority interest - 7,577 398,676 338,449

Earnings per share Basic and diluted earnings per share 23 2.37 EURO 2.03 EURO

These consolidated financial statements were approved by management on 19 February 2008 and were signed on its behalf by:

Anton Artemiev Ekaterina Azimina President Vice-President, Finance and economics

* The consolidated income statement is to be read in conjunction with the notes to and forming part of the consolidated financial statements set out on pages 60 to 87.

55 OAO Baltika Breweries and subsidiaries Consolidated Balance Sheet as at 31 December 2007

Note 2007 2006 ’000 EURO ’000 EURO ASSETS Non-current assets Property, plant and equipment 13 1,095,543 1,004,171 Intangible assets 14 326,633 337,148 Investments in associates 15 7,458 7,669 Other investments 16 273 283 Total non-current assets 1,429,907 1,349,271

Current assets Inventories 18 216,997 153,403 Other investments 16 65,006 196,283 Income tax receivable 198 10,618 Trade and other receivables 19 139,576 117,028 Cash and cash equivalents 20 75,376 46,396 Total current assets 497,153 523,728 Total assets 1,927,060 1,872,999

EQUITY AND LIABILITIES Equity 22 Preference shares 2,320 2,535 Ordinary shares 20,076 21,374 Share capital 22,396 23,909 Additional paid-in capital 104,880 487,375 Treasury shares - (3,034) Foreign currency translation reserve 9,387 65,829 Retained earnings 1,169,912 969,133 Total equity 1,306,575 1,543,212

Non-current liabilities Loans and borrowings 24 16,142 31,900 Deferred tax liabilities 17 42,148 48,162 Total non-current liabilities 58,290 80,062

Current liabilities Loans and borrowings 24 310,887 67,679 Trade and other payables 25 249,573 181,850 Income tax payable 1,735 196 Total current liabilities 562,195 249,725 Total liabilities 620,485 329,787 Total equity and liabilities 1,927,060 1,872,999

The consolidated balance sheet is to be read in conjunction with the notes to and forming part of the consolidated financial statements set out on pages 60 to 87.

56 OAO Baltika Breweries and subsidiaries Consolidated Statement of Cash Flows for the year ended 31 December 2007

2007 2006 ’000 EURO ’000 EURO OPERATING ACTIVITIES Profit for the year 398,676 338,449 Adjustments for: Depreciation 128,829 125,538 Amortisation 2,044 3,116 (Gain)/loss on disposal of property, plant and equipment (61) 163 Share of profit of equity accounted investees (458) (97) Interest expense 7,192 10,762 Interest income (14,455) (17,058) Income tax expense 148,250 103,324 Operating profit before changes in working capital and provisions 670,017 564,197 (Increase) in inventories (70,674) (33,788) (Increase) in trade and other receivables (27,782) (16,283) Increase in trade and other payables 35,185 41,774 (Decrease) in provisions - (1,905) Cash flows from operations before income taxes and interest paid 606,746 553,995 Income taxes paid (140,815) (100,604) Interest paid (6,392) (11,017) Cash flows from operating activities 459,539 442,374

INVESTING ACTIVITIES Proceeds from disposal of property, plant and equipment 901 839 Interest received 17,315 15,097 Dividends received 617 695 Repayment of loans made to banks 42,836 59,786 Loans made to banks (28,557) (59,786) Acquisition of property, plant and equipment and intangible assets (266,824) (192,779) Acquisition of bank promissory notes (48,095) (181,283) Proceeds from bank promissory notes 158,735 115,466 Acquisition of minority interest - (5,006) Net decrease in loans made to third parties - 342 Cash flows utilised by investing activities (123,072) (246,629)

The consolidated statement of cash flows is to be read in conjunction with the notes to and forming part of the consolidated financial statements set out on pages 60 to 87.

57 OAO Baltika Breweries and subsidiaries Consolidated Statement of Cash Flows for the year ended 31 December 2007

2007 2006 ’000 EURO ’000 EURO FINANCING ACTIVITIES Proceeds from the issue of new shares - 5,177 Proceeds from sale of treasury shares 3,618 2,497 Acquisition of treasury shares - (4,473) Proceeds from borrowings 616,497 136,078 Repayment of borrowings (379,870) (186,371) Payment of finance lease liabilities - (7,257) Dividends paid (193,328) (139,047) Redemption of shares (351,966) - Cash flows utilised by financing activities (305,049) (193,396) Net increase in cash and cash equivalents 31,418 2,349 Cash and cash equivalents at beginning of year 46,396 44,746 Effect of exchange rate fluctuations on cash and cash equivalents (2,438) (699) Cash and cash equivalents at end of the year (note 20) 75,376 46,396

The consolidated statement of cash flows is to be read in conjunction with the notes to and forming part of the consolidated financial statements set out on pages 60 to 87.

58 OAO Baltika Breweries and subsidiaries Consolidated Statement of Changes in Equity for the year ended 31 December 2007

Minority Total Attributable to shareholders of the Company interest equity Prefe- Ordinary Additional Treasury Foreign Retained Total rence shares paid-in shares currency earnings shares capital translation ’000 EURO reserve Balance at 1 January 2006 2,536 20,081 365,944 (1,409) 94,683 757,419 1,239,254 34,851 1,274,105 Profit for the year - - - - - 330,872 330,872 7,577 338,449 Foreign currency translation differences - - - - (28,854) - (28,854) - (28,854) Total recognised income and expenses ------302,018 7,577 309,595 Dividends to shareholders - - - - - (119,158) (119,158) (2,911) (122,069) Treasury shares acquired - - - (4,341) - - (4,341) - (4,341) Treasury shares sold - - - 2,716 - - 2,716 - 2,716 Acquisition of minority interest ------(39,517) (39,517) Ordinary shares issued - 1,294 121,431 - - - 122,725 - 122,725 Redemption of shares (1) (1) - - - - (2) - (2) Balance at 31 December 2006 2,535 21,374 487,375 (3,034) 65,829 969,133 1,543,212 - 1,543,212

Balance at 1 January 2007 2,535 21,374 487,375 (3,034) 65,829 969,133 1,543,212 - 1,543,212 Profit for the year - - - - - 398,676 398,676 - 398,676 Foreign currency translation differences - - - - (56,442) - (56,442) - (56,442) Total recognised income and expenses ------342,234 - 342,234 Dividends to shareholders - - - - - (197,897) (197,897) - (197,897) Redemption of shares (215) (1,298) (383,086) - - - (384,599) - (384,599) Treasury shares sold - - 591 3,034 - - 3,625 - 3,625 Balance at 31 December 2007 2,320 20,076 104,880 - 9,387 1,169,912 1,306,575 - 1,306,575

The consolidated statement of changes in equity is to be read in conjunction with the notes to and forming part of the consolidated financial statements set out on pages 60 to 87.

59 OAO Baltika Breweries and subsidiaries Notes to the Consolidated Financial Statements for the year ended 31 December 2007

1. BACKGROUND

(a) Organisation and operations

OAO Baltika Breweries (the ‘Company’) is an open joint stock company as defined by the Civil Code of the Russian Federation and was registered on 21 July 1992, and, through a controlling interest in nine companies and ten branches (together referred to as the ‘Group’), produces and distributes beer and mineral water.

The Company’s registered office is situated at 6 Verkhny pereulok, 3. St. Petersburg, 194292, Russia.

As at 31 December 2007 Baltic Beverages Holding AB owned and controlled 88.21% of the Company’s ordinary shares and 15.49% of the Company’s preference shares. The remainder of the ordinary and preference shares are widely held.

As at 31 December 2007 the Group consisted of ten production plants: Baltika-Saint-Petersburg, Baltika-Tula, Baltika-Rostov, Baltika-Samara, Baltika-Khabarovsk, Baltika-Vena, Baltika-Chelyabinsk, Baltika-Pikra, Baltika-Yaroslavl and Baltika-Voronezh and nine subsidiaries: OOO Baltika-Moscow, OOO Universalopttorg, OOO Terminal Podolsk, OOO Baltika-Ukraine, OsOO Baltika, Baltika S.R.L., Baltika-Almaty LLP, OOO Baltika-Bel and Baltika Deutschland GmbH. The Group started construction of a new plant in Novosibirsk which is expected to be fully operational at the beginning of 2008. OOO Leasing-Optimum was sold in September 2007.

Most of the Group's customers are located in Russia. The Group's raw materials are readily available and the Group is not dependent on a single supplier or only a few suppliers.

Related party transactions are detailed in note 29.

(b) Group structure

The consolidated financial statements of the Group for the year ended 31 December 2007 comprise the Company and its subsidiaries and the Group’s interest in associates. The list of subsidiaries is detailed in note 30. During 2006 the Com- pany, OAO Pikra, OAO Vena, OAO Yarpivo and OAO Zolotoy Ural were under the common control of Baltic Beverages Holding AB.

At the extraordinary shareholders’ meeting on 7 March 2006, shareholders of the Company voted in favour of the pro- posed merger of the Company with brewing companies OAO Pikra, OAO Vena (into which OAO Zolotoy Ural had earlier been merged) and OAO Yarpivo.

Shareholders in OAO Pikra, OAO Vena and OAO Yarpivo (including Baltic Beverages Holding AB) were offered the option of exchanging their shares in OAO Pikra, OAO Vena and OAO Yarpivo for newly issued ordinary shares of the Company or selling their shares to the Company, if they wished to do so. The Company’s ordinary shareholders had the opportunity of either selling their shares back to the Company or retaining their shareholding.

The first share exchange between the Company, Baltic Beverages Holding AB and minority shareholders took place on 3 July 2006. This exchange resulted in the Company becoming the new majority shareholder of OAO Pikra, OAO Vena and OAO Yarpivo with 91.90% of the shares in OAO Pikra, 92.76% in OAO Vena and 87.19% in OAO Yarpivo respectively.

The second share exchange between the Company, Baltic Beverages Holding AB and minority shareholders took place on 28 December 2006. Following this exchange, OAO Pikra, OAO Vena and OAO Yarpivo were fully merged into the Company and became branches of the Company as at 28 December 2006.

In accordance with the Group’s accounting policy, the acquisitions have been accounted for as if they had occurred on 1 January 2005 (refer note 3(a)).

Shares in OAO Pikra, OAO Vena and OAO Yarpivo purchased after 1 January 2005 by Baltic Beverages Holding AB and transferred to the Company during share exchanges in July and December 2006 were recognized as shareholders’ contributions.

60 OAO Baltika Breweries and subsidiaries Notes to the Consolidated Financial Statements for the year ended 31 December 2007

The Russian Federation has been experiencing political and economic change that has affected, and may continue to affect, the activities of enterprises operating in this environment. Consequently, operations in the Russian Federation involve risks that typically do not exist in other markets. The consolidated financial statements reflect management’s assessment of the impact of the Russian business environment on the operations and the financial position of the Group. The future business environment may differ from management’s assessment.

2. BASIS OF PREPARATION

(a) Statement of compliance

These consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (‘IFRSs’).

(b) Basis of measurement

The consolidated financial statements are prepared on the historical cost basis except that derivative financial instruments and financial investments classified as available-for-sale are stated at fair value; property, plant and equipment was revalued to determine deemed cost as part of the adoption of IFRSs; and the carrying amounts of assets, liabilities and equity items in existence at 31 December 2002 include adjustments for the effects of hyperinflation, which were calculated using conversion factors derived from the Russian Federation Consumer Price Index published by the Russian Statistics Agency, GosKomStat. Russia ceased to be hyperinflationary for IFRS purposes as at 1 January 2003.

The national currency of the Russian Federation is the Russian Rouble (‘RUR’), which is the Company’s functional currency and the functional currency of the majority of the Company’s subsidiaries, because it reflects the economic substance of the underling events and circumstances of the Group.

These consolidated financial statements are presented in euro (‘EURO’) since management believes that this currency is more useful for the users of the consolidated financial statements. All financial information presented in EURO has been rounded to the nearest thousand, except where otherwise stated.

The RUR is not a readily convertible currency outside the Russian Federation and, accordingly, any conversion of RUR to EURO should not be construed as a representation that the RUR amounts have been, could be, or will be in the future, convertible into EURO at the exchange rate disclosed, or at any other exchange rate.

(d) Use of judgements, estimates and assumptions

Management has made a number of judgements, estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare these consolidated financial statements in conformity with IFRSs. Actual results may differ from those estimates.

Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimates are revised and in any future periods affected.

In particular, information about significant areas of estimation uncertainty and critical judgments made by management in preparing these consolidated financial statements are described in the following notes:

• Note 14 – Intangible assets

• Note 28 – Contingencies

61 OAO Baltika Breweries and subsidiaries Notes to the Consolidated Financial Statements for the year ended 31 December 2007

3. SIGNIFICANT ACCOUNTING POLICIES

The following significant accounting policies have been applied in the preparation of the consolidated financial statements. These accounting policies have been consistently applied.

(a) Basis of consolidation Subsidiaries

Subsidiaries are entities controlled by the Group. Control exists when the Group has the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities. In assessing control, potential voting rights that currently are exercisable are taken into account. The financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences until the date that control ceases. The accounting policies of subsidiaries have been changed when necessary to align them with the policies adopted by the Group.

Acquisitions of entities under common control

Business combinations arising from transfers of interest in entities that are under the control of the shareholder that controls the Group are accounted for as if the acquisition had occurred at the beginning of the earliest comparative period presented or, if later, at the date that common control was established; for this purpose comparatives are re- stated. The assets and liabilities acquired are recognised at the carrying amounts recognised previously in the Group’s controlling shareholder’s consolidated financial statements. The components of equity of the acquired entities are added to the same components within the Group equity, except that any share capital of the acquired entities is recognised as part of additional paid-in capital. Any cash paid for the acquisition is recognised directly in equity.

Associates

Associates are those entities in which the Group has significant influence, but not control, over the financial and operating policies. Associates are accounted for using the equity method. The consolidated financial statements include the Group’s share of the income and expenses of associates, after adjustments to align the accounting policies with those of the Group, from the date that significant influence commences until the date that significant influence ceases. When the Group’s share of losses exceeds its interest in an associate, the carrying amount of that interest (including any long-term investments) is reduced to nil and the recognition of further losses is discontinued except to the extent that the Group has an obligation or has made payments on behalf of the investee.

Transactions eliminated on consolidation

Intra-group balances, and any unrealised income and expenses arising from intra-group transactions, are eliminated in preparing the consolidated financial statements. Unrealised gains arising from transactions with equity accounted investees are eliminated against the investment to the extent of the Group’s interest in the investee. Unrealised losses are eliminated in the same way as unrealised gains, but only to the extent that there is no evidence of impairment.

(b) Foreign currencies

Transactions in foreign currencies are translated to RUR at exchange rates at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies at the reporting date are retranslated to RUR at the exchange rate at that date. The foreign currency gain or loss on monetary items is the difference between amortised cost in the functional currency at the beginning of the period, adjusted for effective interest and payments during the period. Non- monetary assets and liabilities that are measured at fair value in a foreign currency are translated to RUR at the exchange rate at the date the fair value was determined. Foreign currency differences arising on retranslation are recognised in profit or loss, except for differences arising on the retranslation of available-for-sale equity instruments.

For the purpose of preparing consolidated financial statements in EUROs, the assets and liabilities of Group enterprises are translated to EURO at exchange rates at the reporting date. Income and expenses are translated to EURO at rates approximating exchange rates at the dates of the transactions. Foreign currency differences are recognised directly in equity in the foreign currency translation reserve.

62 OAO Baltika Breweries and subsidiaries Notes to the Consolidated Financial Statements for the year ended 31 December 2007

Non-derivative financial instruments comprise investments in equity and debt securities, trade and other receivables, cash and cash equivalents, loans and borrowings, and trade and other payables.

Non-derivative financial instruments are recognised initially at fair value plus, for instruments not at fair value through profit or loss, any directly attributable transaction costs, except as described below. Subsequent to initial recognition non- derivative financial instruments are measured as described below.

Cash and cash equivalents comprise cash balances and call deposits. Bank overdrafts that are repayable on demand and form an integral part of the Group’s cash management are included as a component of cash and cash equivalents for the purpose of the statement of cash flows.

Accounting for financial income and expenses is discussed in note 3(n).

Held-to-maturity investments If the Group has the positive intent and ability to hold debt securities to maturity, then they are classified as held-to-maturity. Held-to-maturity investments are measured at amortised cost using the effective interest method, less any impairment losses.

Available-for-sale financial assets The Group’s investments in equity securities and certain debt securities are classified as available-for-sale financial assets. Subsequent to initial recognition, they are measured at fair value and changes therein, other than impairment losses (refer note 3(i)), and foreign exchange gains and losses on available-for-sale monetary items (refer note 3(b)), are recognised directly in equity. When an investment is derecognised, the cumulative gain or loss in equity is transferred to profit or loss.

Repurchase transactions The Group purchases financial instruments under agreements to resell identical financial instruments at a future date at a fixed price. Financial instruments purchased subject to commitments to resell them at a future date are not recognized. The amounts paid are accounted for as held-to-maturity bank loans and included in investments in the balance sheet. The difference between the sale and repurchase prices is recognized as interest over the period of the agreement.

Other Other non-derivative financial instruments are measured at amortised cost using the effective interest method, less any impairment losses. Investments in equity securities that are not quoted on a stock exchange and where fair value cannot be estimated on a reasonable basis by other means are stated at cost less impairment losses.

Derivative financial instruments

Embedded derivatives are separated from the host contract and accounted for separately if the economic characteristics and risks of the host contract and the embedded derivative are not closely related, a separate instrument with the same terms as the embedded derivative would meet the definition of a derivative, and the combined instrument is not measured at fair value through profit or loss.

Derivatives are recognised initially at fair value; attributable transaction costs are recognised in profit or loss when incurred. Subsequent to initial recognition, derivatives are measured at fair value, and changes therein are recognised immediately in profit or loss.

63 OAO Baltika Breweries and subsidiaries Notes to the Consolidated Financial Statements for the year ended 31 December 2007

(d) Share capital

Ordinary shares Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of ordinary shares and share options are recognised as a deduction from equity, net of any tax effects. Preference share capital Preference share capital is classified as equity if it is non-redeemable, or redeemable only at the Company’s option, and any dividends are discretionary. Dividends thereon are recognised as distributions within equity.

Repurchase of share capital When share capital recognised as equity is repurchased, the amount of the consideration paid, including directly attributable costs, is net of any tax effects, and is recognised as a deduction from equity. Repurchased shares are classified as treasury shares and are presented as a deduction from total equity. When treasury shares are sold or reissued subsequently, the amount received is recognized as an increase in equity, and the resulting surplus or deficit on the transaction is transferred to / from retained earnings.

(e) Property, plant and equipment Recognition and measurement

Items of property, plant and equipment are measured at cost less impairment losses and, except for land, accumulated depreciation. The cost of property, plant and equipment at 1 January 2004, the date of transition to IFRSs, was determined by reference to its fair value at that date (‘deemed cost’).

Cost includes expenditures that are directly attributable to the acquisition of the asset. The cost of self-constructed assets includes the cost of materials and direct labour, any other costs directly attributable to bringing the asset to a working condition for its intended use, and the costs of dismantling and removing the items and restoring the site on which they are located. Purchased software that is integral to the functionality of the related equipment is capitalised as part of that equipment. Borrowing costs related to the acquisition or construction of qualifying assets are recognized in profit or loss as incurred.

When parts of an item of property, plant and equipment have different useful lives, they are accounted for as separate items (major components) of property, plant and equipment.

Gains and losses on disposal of an item of property, plant and equipment are determined by comparing the proceeds from disposal with the carrying amount of property, plant and equipment and are recognised net within ‘other income’ in profit or loss.

Subsequent costs

The cost of replacing part of an item of property, plant and equipment is recognised in the carrying amount of the item if it is probable that the future economic benefits embodied within the part will flow to the Group and its cost can be measured reliably. The carrying amount of the replaced part is derecognized. The costs of the day-to-day servicing of property, plant and equipment are recognised in profit or loss as incurred.

Depreciation Depreciation is recognised in profit or loss on a straight-line basis over the estimated useful lives of each part of an item of property, plant and equipment. Leased assets are depreciated over the shorter of the lease term and their useful lives unless it is reasonably certain that the Group will obtain ownership by the end of the lease term. Land is not depreciated.

The estimated useful lives for the current and comparative periods are as follows:

• Buildings 25 to 40 years

• Machinery and equipment 5 to 10 years

• Kegs 10 years.

Depreciation methods, useful lives and residual values are reassessed at the reporting date.

64 OAO Baltika Breweries and subsidiaries Notes to the Consolidated Financial Statements for the year ended 31 December 2007

(f) Intangible assets Goodwill

Goodwill (negative goodwill) arises on the acquisition of subsidiaries and associates.

Acquisitions on or after 1 January 2004 For acquisitions on or after 1 January 2004, goodwill represents the excess of the cost of the acquisition over the Group’s interest in the net fair value of identifiable assets, liabilities and contingent liabilities of the acquiree. When the excess is negative (negative goodwill), it is recognised immediately in profit or loss.

Acquisitions of minority interests Goodwill arising on the acquisition of a minority interest in a subsidiary represents the excess of the cost of the additional investment over the carrying amount of the net assets acquired at the date of exchange.

Subsequent measurement Goodwill is measured at cost less accumulated impairment losses. In respect of associates, the carrying amount of goodwill is included in the carrying amount of the investment.

Other intangible assets

Intangible assets that are acquired by the Group, which have finite useful lives, are measured at cost less accumulated amortisation and accumulated impairment losses. Expenditure on internally generated goodwill and brands is recognised in the profit or loss as an expense as incurred.

Amortisation is recognised in profit or loss on a straight-line basis over the estimated useful lives of intangible assets, other than goodwill, from the date that they are available for use. The estimated useful lives of other intangible assets vary between 1 to 10 years.

(g) Leased assets

Leases in terms of which the Group assumes substantially all the risks and rewards of ownership are classified as finance leases. Upon initial recognition the leased asset is measured at an amount equal to the lower of its fair value and the present value of the minimum lease payments. Subsequent to initial recognition, the asset is accounted for in accordance with the accounting policy applicable to that asset.

Other leases are operating leases and the leased assets are not recognised in the Group’s balance sheet.

(h) Inventories

Inventories are measured at the lower of cost and net realisable value. The cost of inventories is based on the weighted average principle and includes expenditure incurred in acquiring the inventories, production or conversion costs and other costs incurred in bringing them to their existing location and condition. In the case of manufactured inventories and work in progress, cost includes an appropriate share of overheads based on normal operating capacity. Net realisable value is the estimated selling price in the ordinary course of business, less the estimated costs of completion and selling expenses.

(i) Impairment Financial assets

A financial asset is assessed at each reporting date to determine whether there is any objective evidence that it is impaired. A financial asset is considered to be impaired if objective evidence indicates that one or more events have had a negative effect on the estimated future cash flows of that asset.

An impairment loss in respect of a financial asset measured at amortised cost is calculated as the difference between its carrying amount and the present value of the estimated future cash flows discounted at the original effective interest rate. An impairment loss in respect of an available-for-sale financial asset is calculated by reference to its fair value.

65 OAO Baltika Breweries and subsidiaries Notes to the Consolidated Financial Statements for the year ended 31 December 2007

Individually significant financial assets are tested for impairment on an individual basis. The remaining financial assets are assessed collectively in groups that share similar credit risk characteristics.

All impairment losses are recognised in profit or loss. Any cumulative loss in respect of an available-for-sale financial asset recognised previously in equity is transferred to profit or loss.

An impairment loss is reversed if the reversal can be related objectively to an event occurring after the impairment loss was recognised. For financial assets measured at amortised cost and available-for-sale financial assets that are debt securities, the reversal is recognised in profit or loss. For available-for-sale financial assets that are equity securities, the reversal is recognised directly in equity.

Non-financial assets

The carrying amounts of the Group’s non-financial assets, other than inventories and deferred tax assets, are reviewed at each reporting date to determine whether there is any indication of impairment. If any such indication exists then the asset’s recoverable amount is estimated. For goodwill and intangible assets that have indefinite lives or that are not yet available for use the, recoverable amount is estimated at each reporting date.

The recoverable amount of an asset or cash-generating unit is the greater of its value in use and its fair value less costs to sell. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. For the purpose of impairment testing, assets are grouped together into the smallest group of assets that generates cash inflows from continuing use that are largely independent of the cash inflows of other assets or groups of assets (the ‘cash- generating unit’). The goodwill acquired in a business acquisition, for the purpose of impairment testing, is allocated to cash-generating units that are expected to benefit from the synergies of the combination.

An impairment loss is recognised if the carrying amount of an asset or its cash-generating unit exceeds its recoverable amount. Impairment losses are recognised in profit or loss. Impairment losses recognised in respect of cash-generating units are allocated first to reduce the carrying amount of any goodwill allocated to the units and then to reduce the carrying amount of the other assets in the unit (group of units) on a pro rata basis.

An impairment loss in respect of goodwill is not reversed. In respect of other assets, impairment losses recognised in prior periods are assessed at each reporting date for any indications that the loss has decreased or no longer exists. An impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount. An impairment loss is reversed only to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortisation, if no impairment loss had been recognised.

(j) Employee benefits

A defined contribution plan is a post-employment benefit plan under which an entity pays fixed contributions into a separate entity and will have no legal or constructive obligation to pay further amounts. Obligations for contributions to defined contribution pension plans, including Russia’s State pension fund, are recognised in profit or loss when they are due. Prepaid contributions are recognised as an asset to the extent that a cash refund or a reduction in future payments is available.

(k) Provisions

A provision is recognised if, as a result of past event, the Group has a present legal or constructive obligation that can be estimated reliably, and it is probable that an outflow of economic benefits will be required to settle the obligation. Provi- sions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the liability.

(l) Revenue

Revenue from the sale of goods is measured at the fair value of the consideration received or receivable, net of returns and allowances, excise taxes, trade discounts and volume rebates. Revenue is recognised when the significant risks and rewards of ownership have been transferred to the buyer, recovery of the consideration is probable, the associated costs and possible return of goods can be estimated reliably, and there is no continuing management involvement with the goods, and the amount of revenue can be measured reliably.

66 OAO Baltika Breweries and subsidiaries Notes to the Consolidated Financial Statements for the year ended 31 December 2007

(m) Other expenses Lease payments

Payments made under operating leases are recognised in profit or loss on a straight-line basis over the term of the lease. Lease incentives received are recognised as an integral part of the total lease expense, over the term of the lease.

Minimum lease payments made under finance leases are apportioned between the finance expense and the reduction of the outstanding liability. The finance expense is allocated to each period during the lease term so as to produce a constant periodic rate of interest on the remaining balance of the liability. Contingent lease payments are accounted for by revising the minimum lease payments over the remaining term of the lease when the lease adjustment is confirmed.

Contingent lease payments are accounted for by revising the minimum lease payments over the remaining term of the lease when the contingency no longer exists and the lease adjustment is known.

Social expenditure

To the extent that the Group’s contributions to social programs benefit the community at large and are not restricted to the Group’s employees, they are recognised in the profit or loss as incurred.

(n) Financial income and expenses

Financial income comprises interest income on funds invested (including available-for-sale investments), dividend income, gains on the disposal of available-for-sale financial assets and foreign currency gains. Interest income is recognised as it accrues in profit or loss, using the effective interest method. Dividend income is recognised on the date that the Group’s right to receive payment is established, which in the case of quoted securities is the ex-dividend date.

Financial expenses comprise interest expense on borrowings, unwinding of the discount on provisions, losses on the disposal of available-for-sale investments, foreign currency losses and impairment losses recognized on financial assets. All borrowing costs are recognised in profit or loss using the effective interest method.

(o) Income tax expense

Income tax expense comprises current and deferred tax. Income tax expense is recognised in profit or loss except to the extent that it relates to items recognised directly to equity, in which case it is recognised in equity.

Current tax expense is the expected tax payable on the taxable income for the year, using tax rates enacted or substantively enacted at the balance sheet date, and any adjustment to tax payable in respect of previous years.

Deferred tax is recognised using the balance sheet method, providing for temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. Deferred tax is not recognised for the following temporary differences: the initial recognition of goodwill, the initial recognition of assets or liabilities in a transaction that is not a business combination and that affects neither accounting nor taxable profit, and differences relating to investments in subsidiaries to the extent that it is probable that they will not reverse in the foreseeable future. Deferred tax is measured at the tax rates that are expected to be applied to the temporary differences when they reverse, based on the laws that have been enacted or substantively enacted by the reporting date. Deferred tax assets and liabilities are offset if there is a legally enforceable right to offset current tax assets and liabilities, and they relate to income taxes levied by the same tax authority on the same taxable entity, or on different tax entities, but they intend to settle current tax liabilities and assets on a net basis or their tax assets and liabilities will be realised simultaneously.

A deferred tax asset is recognised to the extent that it is probable that future taxable profits will be available against which temporary difference can be utilised. Deferred tax assets are reviewed at each reporting date and are reduced to the extent that it is no longer probable that the related tax benefit will be realised.

67 OAO Baltika Breweries and subsidiaries Notes to the Consolidated Financial Statements for the year ended 31 December 2007

(p) Earnings per share

The Group presents basic and diluted earnings per share (EPS) data for its ordinary shares. Basic EPS is calculated by dividing the profit or loss attributable to ordinary shareholders of the Company by the weighted average number of ordinary shares outstanding during the year. Diluted EPS is determined by adjusting the profit or loss attributable to ordinary shareholders and the weighted average number of ordinary shares outstanding for the effects of all dilutive potential ordinary shares.

(q) New Standards and Interpretations not yet adopted

A number of new Standards, amendments to Standards and Interpretations are not yet effective as at 31 December 2007, and have not been applied in preparing these consolidated financial statements. Of these pronouncements, potentially the following will have an impact on the Group’s operations. The Group plans to adopt these pronouncements when they become effective.

• Revised IAS 23 Borrowing Costs removes the option to expense borrowing costs and requires that an entity capi- talise borrowing costs directly attributable to the acquisition, construction or production of a qualifying asset as part of the cost of that asset. The revised IAS 23 will become mandatory for the Group’s 2009 financial statements and will constitute a change in accounting policy for the Group. In accordance with the transitional provisions the Group will apply the revised IAS 23 to qualifying assets for which capitalisation of borrowing costs commences on or after the effective date. The Group has not yet analysed the likely impact of the new Standard on its financial position or performance.

• IFRIC 12 Service Concession Arrangements provides guidance on certain recognition and measurement issues that arise in accounting for public-to-private service concession arrangements. IFRIC 12 becomes mandatory for the Group’s 2008 financial statements. The Group has not yet analysed the likely impact of the new Standard on its financial position or performance.

• IFRIC 13 Customer Loyalty Programmes addresses the accounting by entities that operate, or otherwise participate in, customer loyalty programmes for their customers. It relates to customer loyalty programmes under which the customer can redeem credits for awards such as free or discounted goods or services. IFRIC 13 becomes mandatory for the Group’s 2009 financial statements. The Group has not yet analysed the likely impact of the new Standard on its financial position or performance.

4. DETERMINATION OF FAIR VALUES

A number of the Group’s accounting policies and disclosures require the determination of fair value, for both financial and non-financial assets and liabilities. Fair values have been determined for measurement and / or disclosure purposes based on the following methods. When applicable, further information about the assumptions made in determining fair values is disclosed in the notes specific to that asset or liability.

(a) Property, plant and equipment

The fair value of property, plant and equipment recognised as a result of a business combination is based on market values. The market value of property is the estimated amount for which a property could be exchanged on the date of valuation between a willing buyer and a willing seller in an arm’s length transaction after proper marketing wherein the parties had each acted knowledgeably, prudently and without compulsion. The market value of items of plant, equipment, fixtures and fittings is based on the quoted market prices for similar items.

(b) Intangible assets

The fair value of patents and trademarks acquired in a business combination is based on the discounted estimated royalty payments that have been avoided as a result of the patent or trademark being owned. The fair value of other intangible assets is based on the discounted cash flows expected to be derived from the use and eventual sale of the assets.

68 OAO Baltika Breweries and subsidiaries Notes to the Consolidated Financial Statements for the year ended 31 December 2007

The fair value of inventories acquired in a business combination is determined based on its estimated selling price in the ordinary course of business less the estimated costs of completion and sale, and a reasonable profit margin based on the effort required to complete and sell the inventories.

(d) Investments in equity and debt securities

The fair value of held-to-maturity investments and available-for-sale financial assets is determined by reference to their quoted bid price at the reporting date. The fair value of held-to-maturity investments is determined for disclosure purposes only.

(e) Trade and other receivables

The fair value of trade and other receivables is estimated as the present value of future cash flows, discounted at the market rate of interest at the reporting date.

(f) Non-derivative financial liabilities

Fair value, which is determined for disclosure purposes, is calculated based on the present value of future principal and interest cash flows, discounted at the market rate of interest at the reporting date. For finance leases the market rate of interest is determined by reference to similar lease agreements.

5. FINANCIAL RISK MANAGEMENT

(a) Overview

The Group has exposures to the following risks from the use of financial instruments:

• Credit risk

• Liquidity risk

• Market risk

This note presents information about Group’s exposure to each of the above risks, the Group’s objectives, policies and processes for measuring and managing risk and the Group’s management of capital. Further quantitative disclosures are included throughout these consolidated financial statements.

The Board of Directors has overall responsibility for the establishment and oversight of the Group’s risk management framework. The Board has established an Audit Committee which is responsible for developing and monitoring the Group’s risk management policies. The Audit Committee reports regularly to the Board of Directors on its activities.

The Group’s risk management system are established to identify and analyse the risks faced by the Group, to set appropriate risk limits and controls, and to monitor risks and adherence to limits. Risk management systems are reviewed regularly to reflect changes in market conditions and the Group’s activities. The Group, through its training and management standards and procedures, aims to develop a disciplined and constructive control environment in which all employees understand their roles and obligations.

The Audit Committee oversees how management monitors compliance with the Group’s risk management system and procedures and reviews the adequacy of the risk management framework in relation to the risks faced by the Group. The Audit Committee is assisted in its oversight role by Internal Audit. Internal Audit undertakes both regular and ad hoc reviews of risk management controls and procedures, the results of which are reported to the Audit Committee.

69 OAO Baltika Breweries and subsidiaries Notes to the Consolidated Financial Statements for the year ended 31 December 2007

(b) Credit risk

Credit risk is the risk of financial loss to the Group if a customer or counterparty to a financial instrument fails to meet its contractual obligations and arises principally from the Group’s receivables from customers and investment securities.

(i) Trade and other receivables

The Group’s exposure to credit risk is influenced mainly by the individual characteristics of each customer. The demo- graphics of the Group’s customer base, including the default risk of the industry in which customers operate, has less of an influence on credit risk. Substantially all of Group’s customers are located in the Russian Federation. Approximately 15% (2006: 12%) of the Group’s revenue is attributable to sales transactions with a single customer.

Management has established a credit policy under which each new customer is analysed individually for creditworthiness before the Group’s standard payment and delivery terms and conditions are offered. The Group’s review includes background checks on new customers. Purchase limits are established for each customer. Customers that fail to meet the Group’s benchmark creditworthiness may transact with the Group only on a prepayment basis.

More than 42% of the Group’s customers have been transacting with the Group for more than 2 years, and losses have occurred infrequently. In monitoring customer credit risk, customers are grouped according to their credit characteristics, including whether they are an individual or legal entity, whether they are a wholesale or retail customers, geographic location, maturity, and existence of any previous financial difficulties. The Group requires collateral in respect of financial assets. Credit evaluations are performed on all customers, other than related parties, requiring credit over a certain amount.

The Group establishes an allowance for impairment that represents its estimate of incurred losses in respect of trade and other receivables and investments. The main components of this allowance are a specific loss component that relates to individually significant exposures, and a collective loss component established for groups of similar assets in respect of losses that have been incurred but not yet identified. The collective loss allowance is determined based on historical data of payment statistics for similar financial assets.

(ii) Investments

The Group limits its exposure to credit risk by only investing in liquid securities in accordance with Group’s deposit policy and only with counterparties that are included in the top 50 first-rated banks of Russian Federation according to the size of total assets. In order to determine the amounts to be deposited with each bank the Group studies the financial statements of bank and bank credit ratings. The status of the banks is reconsidered each 6 months.

Liquidity risk is the risk that the Group will not be able to meet its financial obligations as they fall due. The Group’s approach to managing liquidity is to ensure, as far as possible, that it will always have sufficient liquidity to meet its liabilities when due, under both normal and stressed conditions, without incurring unacceptable losses or risking damage to the Group’s reputation.

The Group ensures that it has sufficient cash on demand to meet expected operational expenses for a period of 15 days, including the servicing of financial obligations; this excludes the potential impact of extreme circumstances that cannot be reasonably predicted, such as instability of financial system and the impact of monopolists and changes in statutory regulations. In addition the Group maintains the following lines of credit:

• EURO 31,779 thousand multicurrency secured credit facility. Interest would be payable at the rate of LIBOR/Euribor/ MosPrime+0.55%;

• USD 74,668 thousand multicurrency unsecured credit facility. Interest would be payable at the rate from LIBOR/ MosPrime+0.55% - LIBOR/MosPrime+1% up to approximately 10%;

• USD 2,500 thousand, EURO 500 thousand and RUR 437,773 unsecured credit facility. Interest would be payable at the rate of approximately 10%;

• RUR 80,000 thousand, USD 1,000 thousand and EURO 1,000 thousand unsecured credit facility. Interest would be payable at the rate of MosPrime/LIBOR/Euribor+1%.

70 OAO Baltika Breweries and subsidiaries Notes to the Consolidated Financial Statements for the year ended 31 December 2007

(d) Market risk

Market risk is the risk that changes in market prices, such as foreign exchange rates and interest rates will affect the Group’s income or the value of its holdings of financial instruments. The objective of market risk management is to manage and control market risk exposures within acceptable parameters, while optimizing the return.

(i) Currency risk

The Group is exposed to currency risk on purchases and borrowings that are denominated in a currency other than the respective functional currencies of the Group entities, primarily the USD, but also EURO.

The Group uses forward exchange contracts to hedge its currency risk, most of which have a maturity of less than one year.

(ii) Interest rate risk

Changes in interest rates impact primarily loans and borrowings by changing either their fair value (fixed rate debt) or their future cash flows (variable rate debt). Management does not have a formal policy of determining how much of the Group’s exposure should be subject to fixed or variable rates. However, at the time of raising new loans or borrowings management uses its judgment to decide whether it believes that a fixed or variable rate would be more favorable to the Group over the expected period until maturity.

(iii) Other market risk

Material investments are managed on an individual basis and all buy and sell decisions are approved by the Board of Directors.

The Group does not enter into commodity contracts other than to meet the Group’s expected usage and sale requirements; such contracts are not settled net.

(e) Capital management

The Board’s policy is to maintain a strong capital base so as to maintain investor, creditor and market confidence and to sustain future development of the business. The Board of Directors monitors the level of dividends to ordinary shareholders.

The Board of Directors seeks to maintain a balance between the higher returns that might be possible with higher levels of borrowings and the advantages and security afforded by a sound capital position.

From time to time, the Group repurchases its own shares in the market; the timing of these purchases depends on market prices. All buy and sell decisions are made on a specific transaction basis by the management of the Group.

In 2007, the Group commenced a capital reduction programme, that will be completed at the beginning of 2008, as disclosed, in the note 22. There were no other changes in the Group’s approach to capital management during the year.

Neither the Company nor any of its subsidiaries are subject to externally imposed capital requirements.

6. ACQUISITION OF MINORITY INTERESTS

On 3 July 2006 the Company acquired for shares OAO Pikra, OAO Vena (into which OAO Zolotoy Ural had earlier been merged) and OAO Yarpivo from an entity under common control. The acquisition has been accounted for as if it had taken place on 1 January 2005 (refer note 1(b)).

During 2006 Baltic Beverages Holding AB acquired the minority interests in OAO Pikra, OAO Vena and OAO Yarpivo which resulted in goodwill of EURO 10,549 thousand in 2006, recognized for the purposes of these consolidated financial statements. As a result of the acquisition of the minority interests in OAO Pikra, OAO Vena and OAO Yarpivo during the share exchanges in July and December 2006 the Group recognized additional goodwill of EURO 68,697 thousand (refer note 1(b)). As a result of these two transactions the Group recognised a decrease in minority interests of EURO 39,517 thousand.

71 OAO Baltika Breweries and subsidiaries Notes to the Consolidated Financial Statements for the year ended 31 December 2007

7. DISPOSALS OF SUBSIDIARIES

During the year ended 31 December 2007 the Company disposed of its 100% owned subsidiary OOO Leasing-Optimum to a third party. The net loss on disposal was EURO 20 thousand. The contribution of the subsidiary to the profit for the year and the effect of disposal of the subsidiary on the Group’s assets and liabilities at the date of disposal were insignificant.

8. ADMINISTRATIVE EXPENSES

2007 2006 ’000 EURO ’000 EURO Wages and salaries 25,488 19,243 Depreciation and amortisation 11,292 9,007 Facilities 5,866 4,728 Information technology and communications 4,730 4,295 Other payroll expenses 3,734 4,411 Payroll taxes 3,716 2,992 Charity 1,873 1,640 Other administrative expenses 19,076 16,071 75,775 62,387

9. OTHER INCOME/ (EXPENSES), NET

2007 2006 ’000 EURO ’000 EURO Gain/(loss) on disposal of property, plant and equipment 61 (163) Other income 42 5 103 (158)

10. PERSONNEL COSTS

2007 2006 ’000 EURO ’000 EURO Wages and salaries 143,421 121,123 Contributions to state pension fund 20,115 18,362 Other payroll taxes 7,493 5,730 Other payroll expenses 10,269 12,497 181,298 157,712

72 OAO Baltika Breweries and subsidiaries Notes to the Consolidated Financial Statements for the year ended 31 December 2007

11. FINANCIAL INCOME AND EXPENSES

2007 2006 ’000 EURO ’000 EURO Financial income Interest income 14,455 17,058 Foreign exchange gain 13,377 17,327 27,832 34,385 Financial expenses Interest expense 7,192 10,762 Foreign exchange loss 11,683 8,999 18,875 19,761

12. INCOME TAX EXPENSE

2007 2006 ’000 EURO ’000 EURO Current tax expense Current year 152,719 93,789 Deferred tax expense Origination and reversal of temporary differences (4,469) 9,535 148,250 103,324

The Group’s applicable tax rate is the corporate income tax rate of 24% (2006: 24%).

Reconciliation of effective tax rate:

2007 2006 ’000 EURO % ’000 EURO % Profit before income tax 546,926 100 441,773 100 Income tax at applicable tax rate 131,262 24.0 106,025 24.0 Non-deductible expenses 22,456 4.1 17,384 3.9 Effects of local concessions granted to branches (4,350) (0.8) (3,794) (0.8) Effects of concessions granted in respect of the local portion of the statutory tax rate (3,486) (0.6) (15,803) (3.6) Other 2,368 0.4 (488) (0.1) 148,250 27.1 103,324 23.4

73 OAO Baltika Breweries and subsidiaries Notes to the Consolidated Financial Statements for the year ended 31 December 2007

13. PROPERTY, PLANT AND EQUIPMENT

Land and Machinery Construction Total buildings and Kegs in progress ’000 EURO equipment Cost/deemed cost At 1 January 2006 261,751 732,330 38,548 99,367 1,131,996 Additions 5,364 93,839 3,919 98,443 201,565 Disposals (299) (5,104) (585) (654) (6,642) Transfers 22,915 23,783 2,506 (49,204) - Effect of movements in exchange rate (4,328) (12,761) (675) (2,280) (20,044) At 31 December 2006 285,403 832,087 43,713 145,672 1,306,875 Additions 3,758 183,688 6 71,420 258,872 Disposals (43) (2,420) (397) (116) (2,976) Transfers (2,001) 28,902 1,843 (28,744) - Effect of movements in exchange rate (9,865) (33,961) (1,545) (6,098) (51,469) At 31 December 2007 277,252 1,008,296 43,620 182,134 1,511,302

Depreciation and impairment losses At 1 January 2006 (15,151) (166,497) (5,918) - (187,566) Depreciation charge (8,512) (110,046) (6,980) - (125,538) Disposals 93 5,030 517 - 5,640 Transfers 480 (480) - - - Effect of movements in exchange rate 356 4,207 197 - 4,760 At 31 December 2006 (22,734) (267,786) (12,184) - (302,704) Depreciation charge (8,526) (115,256) (5,047) - (128,829) Disposals 38 1,814 284 - 2,136 Transfers 2,381 (1,796) (585) - - Effect of movements in exchange rate 939 12,143 556 - 13,638 At 31 December 2007 (27,902) (370,881) (16,976) - (415,759)

Net book value At 1 January 2006 246,600 565,833 32,630 99,367 944,430 At 31 December 2006 262,669 564,301 31,529 145,672 1,004,171 At 31 December 2007 249,350 637,415 26,644 182,134 1,095,543

Depreciation expenses of EURO 73,963 thousand have been included in cost of goods sold (2006: EURO 76,423 thousand), EURO 45,236 thousand in distribution expenses (2006: EURO 42,871 thousand) and EURO 9,630 thousand in administrative expense (2006: EURO 6,244 thousand).

74 OAO Baltika Breweries and subsidiaries Notes to the Consolidated Financial Statements for the year ended 31 December 2007

14. INTANGIBLE ASSETS

’000 EURO Goodwill Software and Total Intangible licences assets Cost At 1 January 2006 260,213 5,531 265,744 Additions 79,246 2,944 82,190 Disposals - - - Effect of movements in exchange rate (5,165) (131) (5,296) At 31 December 2006 334,294 8,344 342,638 Additions - 3,163 3,163 Disposals - (4) (4) Effect of movements in exchange rate (11,505) (369) (11,874) At 31 December 2007 322,789 11,134 333,923

Amortisation At 1 January 2006 - (2,461) (2,461) Amortisation charge - (3,116) (3,116) Disposals - - - Effect of movements in exchange rate - 87 87 At 31 December 2006 - (5,490) (5,490) Amortisation charge - (2,044) (2,044) Disposals - 4 4 Effect of movements in exchange rate - 240 240 At 31 December 2007 - (7,290) (7,290)

Net book value At 1 January 2006 260,213 3,070 263,283 At 31 December 2006 334,294 2,854 337,148 At 31 December 2007 322,789 3,844 326,633

Amortisation expenses of EURO 48 thousand have been included in cost of goods sold (2006: EURO 14 thousand), EURO 334 thousand in distribution expenses (2006: EURO 339 thousand) and EURO 1,662 thousand in administrative expense (2006: EURO 2,763 thousand).

75 OAO Baltika Breweries and subsidiaries Notes to the Consolidated Financial Statements for the year ended 31 December 2007

(a) Impairment testing of goodwill

For the purposes of impairment testing, goodwill is considered at the Group level and has not been allocated to individual plants. This represents the lowest level within the Group at which the goodwill is monitored for internal management purposes.

The recoverable amount of the Group’s plants represents the value in use as determined by discounting the future cash flows generated from their continuing use.

The following key assumptions were used in determining the recoverable amount of the Group’s plants:

• Cash flows were projected based on actual operating results and the five-year business plan.

• Total production at the plants for 2007 was approximately 44,558,950 hectoliters. The anticipated annual production growth included in the cash flow projections was between 10% and 18% for the years 2008 to 2012.

• Cash flows for a further five years were extrapolated assuming no further growth in production, and revenue and expenses increasing in line with inflation.

• A discount rate of 14.03% was applied in determining the recoverable amount of the Group’s plants. The discount rate was estimated based on an industry average weighted average cost of capital, which was based on an average industry debt to total capital ratio of 24% at a market interest rate of 8.75%.

The values assigned to the key assumptions represent management’s assessment of future trends in the beer production industry and are based on both external and internal sources.

Although no impairment loss was recognised in respect of goodwill, the determination of the recoverable amount is sensitive to the rate at which the Group achieves its planned growth in production. If actual production were to be below estimated production by 25% in 2008 and subsequent years, the value in use would approximate the carrying amount of the plants.

The Group performed its annual impairment testing of goodwill as at 31 December 2007.

15. INVESTMENT IN ASSOCIATES

The Group has the following investment in associates:

Country Ownership/ Voting Malterie Soufflet Saint Petersburg (‘Soufflet’) Russia 30%

This company produces malt. The Group’s share of post-acquisition total recognised gains and losses in associates as of 31 December 2007 was EURO 5,762 thousand (31 December 2006: EURO 5,913 thousand).

16. OTHER INVESTMENTS

2007 2006 ’000 EURO ’000 EURO Non-current Available-for-sale investments: Stated at cost 273 283 Current Investments held-to-maturity: Promissory notes and deposits 65,006 181,459 Loans to banks - 14,824 65,006 196,283

76 OAO Baltika Breweries and subsidiaries Notes to the Consolidated Financial Statements for the year ended 31 December 2007

Available-for-sale investments stated at cost comprise unquoted equity securities in the brewery and banking industries. There is no active market for these investments and there have not been any recent transactions that provide evidence of fair value. However, management believes it unlikely that the fair value at the end of the reporting period would differ significantly from their carrying amount.

Investments held-to-maturity represent bank promissory notes and deposits purchased from a range of Russian based banks. The maturity period on acquisition of these promissory notes is more than 90 days, and they are measured at amortised cost which approximates their fair value.

The Group’s exposure to credit and market risks related to other investments are disclosed in note 26.

17. DEFERRED TAX ASSETS AND LIABILITIES

Recognised deferred tax assets and liabilities Deferred tax assets and liabilities are attributable to the following:

’000 EURO Assets Liabilities Net 2007 2006 2007 2006 2007 2006 Property, plant and equipment - - (55,376) (55,517) (55,376) (55,517) Intangible assets 220 117 - - 220 117 Investments - - (423) (433) (423) (433) Inventories - - (411) (1,083) (411) (1,083) Trade and other receivables 8,206 4,258 --8,206 4,258 Trade and other payables 5,636 4,574 - (78) 5,636 4,496 Net tax assets/(liabilities) 14,062 8,949 (56,210) (57,111) (42,148) (48,162)

During the year ended 31 December 2007 EURO 4,469 thousand (2006: EURO 9,535 thousand) of the movement in the net deferred tax liability was recognized in the income statement and EURO 1,545 thousand (2006: EURO 750 thousand), relating to foreign exchange differences, was recognized directly in equity.

18. INVENTORIES

2007 2006 ’000 EURO ’000 EURO Raw materials and consumables 166,079 112,921 Work in progress 15,588 10,038 Finished goods and goods for resale 35,330 30,444 216,997 153,403 Write-down of inventories in the current year 4,100 474

77 OAO Baltika Breweries and subsidiaries Notes to the Consolidated Financial Statements for the year ended 31 December 2007

19. TRADE AND OTHER RECEIVABLES

2007 2006 ’000 EURO ’000 EURO Accounts receivable – trade 81,321 59,778 VAT receivable 8,029 9,379 Advances to suppliers 35,574 32,769 Other receivables 17,605 18,671 142,529 120,597 Accumulated impairment losses on receivables (2,953) (3,569) 139,576 117,028

The Group’s exposure to credit risk and currency risk related to trade and other receivables is diclosed in note 26.

20. CASH AND CASH EQUIVALENTS

2007 2006 ’000 EURO ’000 EURO Bank balances 18,731 35,534 Bank deposits and bank promissory notes 42,720 10,862 Loans to banks 13,925 - Cash and cash equivalents in the balance sheet and in the statement of cash flows 75,376 46,396

Loans to banks represent financial instruments purchased from one of the Russian banks under agreement to resell them at future dates (refer note 21).

The Group’s exposure to interest rate risk and a sensitivity analysis for financial assets and liabilities are disclosed in note 26.

21. REPURCHASE AGREEMENTS

The Group purchases financial instruments under agreements to resell them at future dates. The seller commits to repurchase the same or similar instruments at an agreed future date. Repurchase agreements are commonly used as a tool for short-term financing. As at 31 December 2007 financial instruments purchased subject to agreements to resell them were as follows:

Carrying amount of Fair value of assets held Repurchase dates Repurchase price receivables as collateral ’000 EURO ’000 EURO ’000 EURO Loans to banks 13,925 16,178 9 January 2008 13,956

Total interest income earned in connection with repurchase agreements for the year ended 31 December 2007 was EURO 981 thousand (31 December 2006: EURO 1,083 thousand).

78 OAO Baltika Breweries and subsidiaries Notes to the Consolidated Financial Statements for the year ended 31 December 2007

22. EQUITY

(a) Share capital and additional paid-in capital

Number of shares unless otherwise stated Ordinary shares Ordinary shares Preference shares Preference shares 2007 2006 2007 2006 Authorised shares Par value RUR 1 RUR 1 RUR 1 RUR 1

On issue at beginning of the year 161,543,144 117,158,530 13,540,115 13,545,150 Redemption (9,821,436) (7,095) (1,146,112) (5,035) Issued for share exchanges in subsidiaries - 44,201,849 - - Issued for cash - 189,860 - - On issue at end of the period, fully paid 151,721,708 161,543,144 12,394,003 13,540,115

The extraordinary general meeting of shareholders of the Company held on 15 October 2007 approved a resolution to reduce the Company’s charter capital by buying up to 9,894,230 common registered shares having a par value of 1 RUR each and up to 1,225,114 preference type ‘A’ registered shares having a par value of 1 RUR. The purchase was executed from 9 December 2007 to 9 January 2008. As at 31 December 2007, as a result of the purchase of 9,821,436 ordinary shares and 1,146,112 preference shares, the Company’s charter capital has reduced to 164,115,711 shares.

The holders of ordinary shares are entitled to receive dividends as declared from time to time and are entitled to one vote per share at meetings of the Company.

Preference shares have no right of conversion or redemption, but are entitled to an annual dividend equal to the nominal value of the shares multiplied by the interest rate of the Savings Bank of the Russian Federation, plus 10%. If the dividend is not paid, preference shares carry the right to vote until the following Annual Shareholders’ Meeting. However, the dividend is not cumulative. The preference shares also carry the right to vote in respect of issues that influence the interests of preference shareholders, including reorganisation and liquidation.

In the event of liquidation, preference shareholders first receive any declared unpaid dividends and the par value of the preference shares (‘liquidation value’). Thereafter all shareholders, ordinary and preference, participate equally in the distribution of the remaining assets.

(b) Treasury shares

At the balance sheet date the Company held none of its own ordinary and preference shares (31 December 2006: 85,020 ordinary and 31,875 preference shares).

In accordance with Russian legislation, distributable reserves are limited to the balance of accumulated retained earnings as recorded in the Company’s statutory financial statements, prepared in accordance with Russian Accounting Principles. As at 31 December 2007 the Company had retained earnings, including profit for the current year of approximately EURO 517,415 thousand (31 December 2006: EURO 710,861 thousand).

79 OAO Baltika Breweries and subsidiaries Notes to the Consolidated Financial Statements for the year ended 31 December 2007

The following table details the dividends declared by the Company for the years ended 31 December 2007 and 31 December 2006:

RUR per share EURO per share ’000 equivalent EURO 31 December 2006 Preference shares Dividends for 2005 24.33 0.71 9,553 Ordinary shares Dividends for 2005 24.33 0.71 82,629

31 December 2007 Preference shares Dividends for 2006 39.5 1.13 15,312 Ordinary shares Dividends for 2006 39.5 1.13 182,585

The Shareholders’ meeting held on 15 May 2007 approved dividends amounting to EURO 197,897 thousand.

During the year ended 31 December 2006 the following dividends were declared by OAO Vena, OAO Yarpivo and OAO Pikra to Baltic Beverages Holding AB and minority shareholders (refer note 1(b)): OAO Vena – EURO 16,723 thousand, OAO Yarpivo – EURO 13,164 thousand and OAO Pikra – nil.

23. EARNINGS PER SHARE

The calculation of earnings per share is based upon the profit for the year and the weighted average number of ordinary shares outstanding during the year, calculated as shown below. The Company has no potentially dilutive securities.

Weighted average number of ordinary shares

Number of shares unless otherwise stated 2007 2006 Issued shares at 1 January 161,543,144 117,158,530

Shares issued in July and December 2006 to Baltic Beverages Holding AB deemed to have been issued as at 1 January 2005 - 25,513,046

Shares issued in July and December 2006 to Baltic Beverages Holding AB deemed to have been issued during 2005 and 2006 - 14,666,287

Effect of own shares held (38,803) (59,648)

Effect of shares issued in July and December 2006 to minority shareholders - 1,035,500

Effect of redemption of shares (53,427) -

Weighted average number of shares for the year ended 31 December 161,450,914 158,313,715

Profit attributable to ordinary shareholders 2007 2006 ’000 EURO ’000 EURO Profit for the year attributable to shareholders of the Company 398,676 330,872

Preference dividends recognised during the year (15,312) (9,553)

Net profit attributable to ordinary shares 383,364 321,319

80 OAO Baltika Breweries and subsidiaries Notes to the Consolidated Financial Statements for the year ended 31 December 2007

24. LOANS AND BORROWINGS

This note provides information about the contractual terms of the Group’s loans and borrowings. For more information about the Group’s exposure to liquidity risk and market risk refer note 26.

2007 2006 ’000 EURO ’000 EURO Non-current Unsecured bank facility 528 1,760 Secured bank loans 15,614 30,140 16,142 31,900 Current Unsecured bank facility 130,846 25,686 Current portion of secured bank loans 180,041 12,895 Bonds issued - 29,098 310,887 67,679

Bank loans are secured by the guarantee of the Company’s parent company, Baltic Beverages Holding AB, for the full amount.

25. TRADE AND OTHER PAYABLES

2007 2006 Trade and other payables ’000 EURO ’000 EURO Accounts payable – trade 133,461 120,830 Share buy back payable 40,395 - Taxes payable 32,858 23,472 Accrued salaries, wages and benefits 30,444 23,313 Dividends payable 5,958 2,060 Payables to associates 2,244 1,978 Other payables and accrued expenses 4,213 10,197 249,573 181,850

The Group’s exposure to liquidity risk and market risk related to trade and other payables is disclosed in note 26.

26. FINANCIAL INSTRUMENTS

(a) Credit risk

Exposure to credit risk

The carrying amount of financial assets represents the maximum credit exposure. The maximum exposure to credit risk at the reporting date was:

81 OAO Baltika Breweries and subsidiaries Notes to the Consolidated Financial Statements for the year ended 31 December 2007

Carrying amount 2007 2006 ’000 EURO ’000 EURO Trade and other receivables 139,576 117,028 Available-for-sale financial assets 273 283 Held-to-maturity investments 65,006 196,283 Cash and cash equivalents 75,376 46,396 280,231 359,990

The maximum exposure to credit risk for trade receivables at the reporting date by type of customer was:

Carrying amount 2007 2006 ’000 EURO ’000 EURO Wholesale customers 80,667 59,358 Retail customers 654 420 81,321 59,778 Accumulated impairment losses on receivables (2,953) (3,569) 78,368 56,209

The Group's most significant customer, a domestic wholesaler, accounts for EURO 2,112 thousand of the trade receivables carrying amount as at 31 December 2007 (2006: EURO 7,804 thousand).

Impairment losses

The ageing of trade receivables at the reporting date was:

Gross Impairment Gross Impairment 2007 2007 2006 2006 ’000 EURO ’000 EURO ’000 EURO ’000 EURO Current 74,979 - 55,524 - Past due 0 – 180 days 3,389 - 322 111 More than 180 days 2,953 2,953 3,932 3,458 81,321 2,953 59,778 3,569

The movement in the allowance for impairment in respect of trade receivables during the year was as follows:

2007 2006 ’000 EURO ’000 EURO Balance 1 January 3,569 3,240 Impairment loss (reversed)/recognised (239) 1,075 Impairment loss utilised (377) (746) Balance 31 December 2,953 3,569

Based on historic default rates the Group believes that no impairment allowance is necessary in respect of trade receivables not past due and past due by up to 180 days. More than 75% of the balance, which includes the amount owed by the Group's most significant customer (see above), relates to customers that have a good track record with the Group. The allowance accounts in respect of trade receivables are used to record impairment losses unless the Group is satisfied that no recovery of the amount owing is possible; at that point the amount considered irrecoverable is written off against the financial asset directly. The entire amount EURO 2,953 thousand of impairment losses as at 31 December 2007 represents collective impairments on the Group's trade receivables (2006: EURO 3,458 thousand).

82 OAO Baltika Breweries and subsidiaries Notes to the Consolidated Financial Statements for the year ended 31 December 2007

At 31 December 2007 and 2006 there was no allowance for impairment of held-to-maturity investments. The collateral held in relation to loans to banks is disclosed in note 21.

At the balance sheet date there were no significant concentrations of credit risk. The maximum exposure to credit risk is represented by the carrying amount of each financial asset in the balance sheet.

(b) Liquidity risk

The following are the contractual maturities of financial liabilities, including estimated interest payments:

31 December 2007

’000 EURO Carrying Contractual 6 months 6-12 1-2 years 2-5 years More than amount cash flows or less months 5 years Non-derivative financial liabilities 195,655 201,507 178,688 6,366 12,238 4,215 - Secured bank loans 131,374 133,574 132,475 557 542 - - Unsecured bank loans 249,573 249,573 249,573 - - - - Trade and other payables 576,602 584,654 560,736 6,923 12,780 4,215 -

31 December 2006

’000 EURO Carrying Contractual 6 months 6-12 1-2 years 2-5 years More than amount cash flows or less months 5 years Non-derivative financial liabilities 43,035 48,318 7,859 7,560 14,509 18,390 - Secured bank loans 27,446 27,819 24,607 1,341 1,266 605 - Unsecured bank loans 29,098 31,336 1,257 30,079 - - - Bonds 181,850 181,850 181,850 - - - - Trade and other payables 281,429 289,323 215,573 38,980 15,775 18,995

The Group's exposure to foreign currency risk was as follows based on notional amounts:

31 December 2007 31 December 2006 ’000 EURO EURO USD EURO USD Current assets Cash and cash equivalents 338 37,549 1,394 4,482 Held-to-maturity investments - 63,427 6,156 27,255 Trade receivables 123 47 127 138 Current liabilities Secured bank loans (31,667) (148,374) - (12,895) Unsecured bank loans (30,057) (71,458) - (10,966) Trade payables (22,492) (48,102) (47,944) (21,484) Non-current liabilities Secured bank loans - (15,614) - (30,140) Unsecured bank loans - (528) - (1,760) Gross balance sheet exposure (83,755) (183,053) (40,267) (45,370) Net Group exposure from commitments and anticipated transactions (29,900) - (51,000) - Forward exchange contracts - - 7,200 - Net exposure (113,655) (183,053) (84,067) (45,370)

83 OAO Baltika Breweries and subsidiaries Notes to the Consolidated Financial Statements for the year ended 31 December 2007

The following exchange rates applied during the year and as at the end of the year:

EURO 1 equals Average rate Reporting date spot rate 2007 2006 2007 2006 USD 1.3692 1.2549 1.4639 1.3177 RUR 35.0174 34.1146 35.9332 34.6965

Sensitivity analysis

A 10% strengthening of the RUR against the EURO at 31 December would have increased profit by EURO 11,366 thousand (2006: EURO 8,407 thousand). A 10% strengthening of the RUR against USD at 31 December would have increased profit by EURO 18,305 thousand (2006: EURO 4,537 thousand). A 10% weakening of the RUR against EURO and USD at 31 December would have had the equal, but opposite effect on the above currencies to the amounts shown above, on the basis that all other variables, in particular interest rates, remain constant.

(d) Interest rate risk

Profile

At the reporting date the interest rate profile of the Group's interest-bearing financial instruments was:

’000 EURO Carrying amount Fixed rate instruments 2007 2006 Financial assets 121,651 207,145 Financial liabilities (298,256) (53,610) (176,605) 153,535 Variable rate instruments Financial liabilities (28,773) (45,969)

Cash flow sensitivity analysis for variable rate instruments

A change of 100 basis points in interest rates at the reporting date would have increased (decreased) profit and loss by the amounts shown below. This analysis assumes that all other variables, in particular foreign currency rates, remain constant. The analysis is performed on the same basis for 2006.

31 December 2007 Profit or loss 100 bp 100 bp ’000 EURO Increase Decrease Variable rate instruments (288) 288 Cash flow sensitivity (288) 288

31 December 2006

’000 EURO Variable rate instruments (460) 460 Cash flow sensitivity (460) 460

(e) Fair values

The basis for determining fair value is disclosed in note 4. The fair value of unquoted equity instruments is discussed in note 16. In other cases management believes that the fair value of the Group’s financial assets and liabilities approximates their carrying amounts.

84 OAO Baltika Breweries and subsidiaries Notes to the Consolidated Financial Statements for the year ended 31 December 2007

27. COMMITMENTS

As at 31 December 2007 the Group had the following commitments relating to the property, plant and equipment (31 December 2006: EURO 73,800 thousand):

Project 2007 ’000 EURO Baltika-St. Petersburg plant 25,200 Baltika-Novosibirsk plant 17,400 Baltika-Yaroslavl plant 14,200 Baltika-Voronezh plant 8,100 Baltika-Samara plant 7,800 Baltika-Chelyabinsk plant 1,400 Baltika-Tula plant 700 Baltika-Pikra plant 700 Baltika-Rostov plant 500 Total 76,000

28. CONTINGENCIES

Taxation contingencies

The taxation system in the Russian Federation is relatively new and is characterised by frequent changes in legislation, official pronouncements and court decisions, which are often unclear, contradictory and subject to varying interpretation by different tax authorities. Taxes are subject to review and investigation by a number of authorities, which have the authority to impose severe fines, penalties and interest charges. A tax year remains open for review by the tax authorities during the three subsequent calendar years; however, under certain circumstances a tax year may remain open longer. Recent events within the Russian Federation suggest that the tax authorities are taking a more assertive position in their interpretation and enforcement of tax legislation.

These circumstances may create tax risks in the Russian Federation that are substantially more significant than in other countries. Management believes that it has provided adequately for all tax liabilities based on its interpretations of applicable Russian tax legislation, official pronouncements and court decisions. However, the interpretations of the relevant authorities could differ and the effect on these consolidated financial statements, if the authorities were successful in enforcing their interpretations, could be significant.

The Group is currently challenging in court a number of VAT and income tax assessments totalling EURO 4,598 thousand. Management has not provided any amount in respect of such obligations in these consolidated financial statements as it believes it is possible, but not probable that an outflow of economic benefits will be required to settle such obligations.

29. RELATED PARTY TRANSACTIONS

(a) Control relationships

The Company’s parent company is Baltic Beverages Holding AB (refer note 1(a)). Baltic Beverages Holding AB is owned by Pripps Ringnes AB (50%) and Oy Hartwall AB (50%). The ultimate parent company of Pripps Ringnes AB is Carlsberg Breweries A/S. The ultimate parent company of Oy Hartwall AB is Scottish & Newcastle Plc.

The Company’s parent company does not produce financial statement that are available for public use.

85 OAO Baltika Breweries and subsidiaries Notes to the Consolidated Financial Statements for the year ended 31 December 2007

(b) Management remuneration

Key management personnel received EURO 10,139 thousand as salaries and bonuses during the year ended 31 De- cember 2007 (EURO 7,903 thousand during the year ended 31 December 2006), which is included in personnel costs. Defined contribution pension expenses for key management personnel amounted to EURO 181 thousand (2006: nil).

The Group’s other related party transactions are disclosed below.

2007 2006 ’000 EURO ’000 EURO Sale of goods: Parent company 361 323 Fellow subsidiaries 1,927 6,216 Royalties received: Parent company 14 - Fellow subsidiaries 1,104 562 Services provided: Associate 1,968 1,929 5,374 9,030

2007 2006 ’000 EURO ’000 EURO Purchase of inventory: Associate 19,661 15,668 Fellow subsidiaries 496 - Services received: Associate 160 194 Fellow subsidiaries 198 437 Royalties paid: Fellow subsidiaries 10,517 2,769 Interest on borrowings: Parent company - 2,187 31,032 21,255

Sales to and purchases from related parties are made on terms that prevail in arm’s length transactions. For the year ended 31 December 2007, the Group recognized no impairment of receivables owed by related parties (2006: Nil).

Trade and other receivables due from related parties at the end of the year were as follows:

2007 2006 ’000 EURO ’000 EURO Receivables: Parent company 53 109 Fellow subsidiaries 233 1,290 286 1,399

86 OAO Baltika Breweries and subsidiaries Notes to the Consolidated Financial Statements for the year ended 31 December 2007

Trade and other payables due to related parties at the end of the year were as follows:

2007 2006 ’000 EURO ’000 EURO Trade payables: Fellow subsidiaries 288 853 Associate 2,244 1,978 Royalties payable: Fellow subsidiaries 2,277 563 Financial liabilities Parent company 333 - Fellow subsidiaries 54 84 5,196 3,478

All outstanding balances with related parties are to be settled in cash within two months of the balance sheet date. None of the balances are secured.

During the year ended 31 December 2007 the Group’s purchases of malt from Soufflet, an associate of the Group, amounted to EURO 19,661 thousand (excluding VAT) or 8.9% of the total value of malt purchases and own production and 66,293 tons or 10.3% of the total volume of malt purchases and own production. During the year ended 31 December 2006 the Group's malt purchases from Soufflet amounted to EURO 15,668 thousand (excluding VAT) or 11.3% of the total value of malt purchases and own production and 63,759 tons or 10.9% of the total volume of malt purchases and own production.

The liability to Soufflet for malt purchases amounted to EURO 2,244 thousand and EURO 1,978 thousand as at 31 De- cember 2007 and 31 December 2006, respectively.

During the year ended 31 December 2007 and 2006 the Group provided various services to Soufflet and received various services from Soufflet for insignificant amounts. 30. SUBSIDIARIES

Name Nature of business Country of Ownership/ Ownership/ incorporation voting voting 2007 2006 OOO Baltika-Moscow Distribution of Baltika beer Russia 100% 100% OOO Leasing-Optimum Leasing Russia -100% OOO Baltika-Ukraine Distribution of Baltika beer Ukraine 100% 100% Baltika S.R.L. Distribution of Baltika beer Moldova 100% 100% Baltika-Almaty LLP Distribution of Baltika beer Kazakhstan 100% 100% OsOO Baltika Distribution of Baltika beer Kirgizia 100% 100% OOO Baltika-Bel Distribution of Baltika beer Belorussia 100% 100% OOO Terminal Podolsk Warehouse Russia 100% 100% OOO Universalopttorg Warehouse Russia 100% 100% Baltika Deutschland GmbH Distribution of Baltika beer Germany 100% 100%

31. EVENTS SUBSEQUENT TO THE BALANCE SHEET DATE

In January 2008, the Group completed the share buy back programme that started in 2007 (refer note 22) and repurchased additional 7,114 ordinary and 67,433 preference shares. Subsequent to this repurchase, the Company’s charter capital reduced to 164,041,164 shares.

On 25 January 2008 the Boards of Sunrise Acquisitions Limited, a newly incorporated company jointly owned by Carls- berg A/S and Heineken N.V., and Scottish & Newcastle Plc. (‘S&N’) announced that they had reached agreement on the terms of a recommended cash offer to be made by Sunrise Acquisitions Limited for the entire issued and to be issued share capital of S&N. This will result in Carlsberg A/S gaining full control of BBH AB, the Group's immediate parent company, and becoming the Group's ultimate parent company and ultimate controlling party.

87 INTERESTED PARTY TRANSACTIONS

List of interested party transactions concluded by the Company in 2007

№ Parties to the agreement Form of agreement Value of the agreement Information about the person(s) interested in the transaction

1. Baltika Breweries (Supplier ) and Agreement to supply €300,000 Shareholder Baltic Feldschlosschen Getranke AG beer Beverages Holding AB (Buyer)

2. Baltika Breweries (Supplier) and Supplemental In accordance with the main Shareholder Baltic Baltika Deutschland GmbH (Buyer) agreement to the Agreement Beverages Holding AB Supply Agreement

3. Baltika Breweries (Principal) and Agency contract Agent’s fee is $75,220 Shareholder Baltic OОО Baltika (Agent) Beverages Holding AB

4. Baltika Breweries (Principal) and Agency contract Agent’s fee is $460,830 Shareholder Baltic Baltika-Almaty LLP (Agent) Beverages Holding AB

5. Baltika Breweries (Licensor) and License agreement License fee amounts to Shareholder Baltic Scottish & Newcastle UK Ltd 4.5% of net turnover Beverages Holding AB (Licensee)

6. Baltika Breweries (Buyer) and Agreement to supply €784,680 Shareholder Baltic Holsten AG (Supplier) equipment Beverages Holding AB

7. Baltika Breweries (Buyer) and Agreement to supply €5,409,800.21 Shareholder Baltic Holsten AG (Supplier) equipment Beverages Holding AB

8. Baltika Breweries (Customer) and Appendix to 63,570,400 Belarus rubles Shareholder Baltic Baltika-Bel Ltd (Contractor) agreement on excl. VAT Beverages Holding AB providing services

9. Baltika Breweries, the company Agreement to supply The total amount of the Shareholder Baltic Slavutich, the company Svyturus- caps agreement shall not exceed Beverages Holding AB Utenos Alus, the company €55,000,000, Baltika Carlsberg Breweries A/S (Buyers) Breweries’ payment shall not and the company Pelliconi & C. be more than €31,000,000 SPA (Seller)

10. Baltika Breweries (Principal) and Supplemental Increase in the amount Shareholder Baltic OОО Baltika (Agent) agreement to Agency of agent’s fee Beverages Holding AB contract to 2,200,000 rubles

11. Baltika Breweries (Customer) Agreement to provide Not more than £18,000, excl. Shareholder Baltic and Scottish & Newcastle Plc. training services accommodation expenses Beverages Holding AB (Contractor) and VAT

12. Baltika Breweries (Customer) Agreement to provide Not more than €36,300, Shareholder Baltic and Carlsberg Breweries A/S training services excl. VAT Beverages Holding AB (Contractor)

13. Baltika Breweries (Supplier) and Agreement to supply €15,360 Shareholder Baltic Sociedade Central De Cervejas e beer Beverages Holding AB Bebidas S.A. (Buyer)

88 INTERESTED PARTY TRANSACTIONS

№ Parties to the agreement Form of agreement Value of the agreement Information about the person(s) interested in the transaction

14. Baltika Breweries (Licensee) License agreement License fee amounts Shareholder Baltic and Carlsberg Breweries A/S to 4.5% of net turnover of Beverages Holding AB (Licensor) goods produced under license

15. Baltika Breweries (Assignor) and Agreement on 36,000 rubles Shareholder Baltic S&NF Limited (Assignee) assignment of a trade Beverages Holding AB mark

16. Baltika Breweries (User) and S&NF Agreement on transfer Compensation for transfer Shareholder Baltic Limited (Assignor) of copyrights and of copyrights and rights to Beverages Holding AB rights to know-how know-how amounts to 4% of net turnover

17. Baltika Breweries (Subscriber) and Agreement The services are paid for Member of the Board Vympelcom Communication OJSC on providing according to the rate plan of Directors Alexander (Operator) telecommunication approved by the Operator Izosimov services

18. Baltika Breweries (New Creditor) Agreement on 7,111,254.67 rubles Shareholder Baltic and Universaloptorg Ltd (Creditor) assignment of a claim Beverages Holding AB

19. Baltika Breweries (Principal) and Agency agreement Remuneration for the main Shareholder Baltic Maulterie Soufflet services amounts to Beverages Holding AB Saint-Petersburg (Proxy) 54,800 rubles per month Member of the Board excl. VAT. of Directors Anton Agreement valid for 5 years Artemiev (who is at the same time a member of the Board of Directors of Maulterie Soufflet Saint-Petersburg)

20. Baltika Breweries (Licensee) License agreement for License fee amounts Shareholder Baltic and Carlsberg Breweries A/S use of trade marks to 4.5% of net turnover of Beverages Holding AB (Licensor) goods produced under license

21. Baltika Breweries (Licensee) Supplemental License fee amounts Shareholder Baltic and Carlsberg Breweries A/S agreement to the to 4.5% of net turnover of Beverages Holding AB (Licensor) License agreement for goods produced under use of trade marks license

22. Baltika Breweries (Licensee) Supplemental License fee is paid in Shareholder Baltic and Carlsberg Breweries A/S agreement to the accordance with the terms of Beverages Holding AB (Licensor) License agreement for the License agreement use of trade marks

23. Baltika Breweries (Assignor) Agreement on 82,300 rubles Shareholder Baltic and Carlsberg Breweries A/S assignment of patents Beverages Holding AB (Assignee) for utility models

24. Baltika Breweries (Licensee) and License agreement for License fee amounts Shareholder Baltic S&NF Limited (Licensor) use of trade marks to 4% of net turnover of Beverages Holding AB goods produced under license

INTERESTED PARTY TRANSACTIONS 89 INTERESTED PARTY TRANSACTIONS

№ Parties to the agreement Form of agreement Value of the agreement Information about the person(s) interested in the transaction

25. Baltika Breweries (Licensee) and License agreement for License fee amounts Shareholder Baltic Scottish & Newcastle UK Limited use of trade marks to 4.5% of net turnover of Beverages Holding AB (Licensor) goods produced under license

26. Baltika Breweries (Customer) and Agreement 42,221,700 Belarus rubles Shareholder Baltic Baltika-Bel Ltd (Contractor) on providing excl. VAT Beverages Holding AB compensable services

27. Baltika Breweries (Customer) and Agreement 1,512,000 Kazakh tenge Shareholder Baltic Baltika-Almaty Ltd (Contractor) on providing excl. VAT Beverages Holding AB compensable services

28. Baltika Breweries (Customer) and Agreement €8,000 excl. VAT Shareholder Baltic Oy Sinebrychoff AB (Contractor) on providing Beverages Holding AB compensable services

29. Baltika Breweries (Licensee) Appendix to License The total amount of investment Shareholder Baltic and Carlsberg Breweries A/S agreement for beer for promotion and advertising Beverages Holding AB (Licensor) production product made under license in the Republic of Moldova during the period 2007-2010 comprises: $99,150 excl. VAT from the Licensor, $148,850 excl. VAT from the Licensee

30. Baltika Breweries (Licensee) Appendix to License Total amount of investment Shareholder Baltic and Carlsberg Breweries A/S agreement on beer for promotion and advertising Beverages Holding AB (Licensor) production product made under license amounts to $710,500

31. Baltika Breweries (Energy Agreement to supply Payment for the energy Shareholder Baltic Supplier) and Maulterie Soufflet electricity shall be made every month Beverages Holding AB Saint-Petersburg (Subscriber) in accordance with tariffs Member of the Board based on Regional Energy of Directors Anton Commission (REC) rates Artemiev (who is at the same time a member of the Board of Directors of Maulterie Soufflet Saint-Petersburg)

32. Baltika Breweries (Energy Agreement to supply Payment for the energy Shareholder Baltic Provider) and Maulterie Soufflet steam shall be made every month Beverages Holding AB Saint-Petersburg (Subscriber) in accordance with tariffs Member of the Board based on Regional Energy of Directors Anton Commission (REC) rates. Artemiev (who is Additionally the price at the same time per Gcal shall increase a member of the to compensate Energy Board of Directors Provider for liability insurance of Maulterie Soufflet expenses Saint-Petersburg)

33. Baltika Breweries (Licensee) Appendix to the The total amount of Licensor Shareholder Baltic and Carlsberg Breweries A/S License agreement marketing investment comes Beverages Holding AB (Licensor) on supplemental to $1,694,500 advertising investment in 2007

90 INTERESTED PARTY TRANSACTIONS

№ Parties to the agreement Form of agreement Value of the agreement Information about the person(s) interested in the transaction

34. Baltika Breweries (Customer) and Agreement 885,000 rubles incl. 18% VAT Shareholder Baltic OОО Baltika (Contractor) on providing Beverages Holding AB compensable services

35. Baltika Breweries (Company) Agreement on €400,000 Shareholder Baltic and Baltic Beverages Holding AB payment for issuing a Beverages Holding AB (Guarantor) guarantee

36. Baltika Breweries (Exporter) Beer sale-purchase €1,000,000 Shareholder Baltic and Baltika Deutschland Gmbh agreement Beverages Holding AB (Importer)

37. Baltika Breweries (Exporter) and Beer sale-purchase €200,000 Shareholder Baltic Carlsberg Canada (Importer) agreement Beverages Holding AB Member of the Board of Directors J. B. Rasmussen (who is at the same time the CEO of the company Carlsberg Breweries)

38. Baltika Breweries (Customer) and Supplemental 35,304,300 Belarus rubles Shareholder Baltic Baltika-Bel Ltd (Contractor) agreement to excl. VAT Beverages Holding AB Agreement on providing compensable services

39. Baltika Breweries (Customer) and Agreement 425,000,000 Belarus rubles Shareholder Baltic Baltika-Bel Ltd (Contractor) on providing incl. VAT Beverages Holding AB compensable services

40. Baltika Breweries (Customer) and Agreement $240,000 incl. VAT Shareholder Baltic ICS BALTIKA SRL (Contractor) on providing Beverages Holding AB compensable services

41. Baltika Breweries (Customer) and Agreement €15,000 excl. VAT Shareholder Baltic Scottish & Newcastle UK Limited on providing Beverages Holding AB (Contractor) compensable services

All the interested party transactions were approved by the Company’s Board of Directors.

INTERESTED PARTY TRANSACTIONS 91 INFORMATION FOR SHAREHOLDERS AND INVESTORS

Baltika Breweries

6th Verkhny pereulok, 3 Company Headquarters +7 (812) 325 9 325 194292 St. Petersburg, Russia www.baltika.ru

[email protected] Shareholder relations +7 (812) 329 91 09 [email protected]

Investor relations +7 (812) 326 90 46 [email protected]

Registrar

Izmailovsky Pr., 4-A, office 314 National Registry Company CJSC +7 (812) 251 81 38 190005 St. Petersburg, Russia St. Petersburg Branch +7 (812) 346 74 07 www.nrcreg.ru

Independent Auditors

Moskovsky Pr., 19, Level 4 ZAO KPMG +7 (812) 325 83 48 190005 St. Petersburg, Russia St. Petersburg Branch [email protected]

Rizhsky Pr., 26 A&P Audit CJSC +7 (812) 251 69 23 198103 St. Petersburg, Russia [email protected]

Ernst & Young LLC Ul. Malaya Morskaya, 23A +7 (812) 703 78 00 St. Petersburg Branch 190000 St. Petersburg, Russia

Official print media for disclosure of information Newspaper Izvestiya

92 Design, print www.artgroove.ru CONTACT INFORMATION

Company Headquarters 6th Verkhny pereulok, 3 Baltika-St. Petersburg Brewery +7 (812) 325 9 325 194292 St. Petersburg

Subsidiaries Ul. Farforovskaya, 1 Baltika-Vena +7 (812) 326 21 00 192171 St. Petersburg th Baltika-Voronezh +7 (4732) 21 58 42 Ul. 9 Yanvarya, 109 +7 (4732) 21 03 88 394027 Voronezh nd Baltika-Novosibirsk +7 (383) 341 88 64 Ul. 2 Stantsionnaya, 34 630041 Novosibirsk Ul. 60 Let Oktyabrya, 90 Baltika-Pikra +7 (3912) 59 12 00 660079 Krasnoyarsk +7 (863) 222 27 90 Ul. Dovatora, 146-A Baltika-Rostov +7 (863) 250 52 78 344090 Rostov-on-Don Baltiisky Proyezd, 1 Baltika-Samara +7 (8462) 76 43 76 Kinelsky District, Village of Kinelsky 446110 Samarskaya Oblast Odoyevskoye Shosse, 85 Baltika-Tula +7 (4872) 39 55 35 300036 Tula Voronezhskoye Shosse, 142 Baltika-Khabarovsk +7 (4212) 41 15 51 680042 Khabarovsk Ul. Ryleeva, 16 Baltika-Chelyabinsk +7 (3512) 39 16 00 454087 Chelyabinsk Ul. Pozharskogo, 63 Baltika-Yaroslavl +7 (4852) 58 32 03 150066 Yaroslavl

Representations abroad Ul. Storozhevskaya, 15, office 302 Baltika-Bel Ltd (375) 17 28 9 54 69 Minsk, Belarus Ul. Mitropolita G. Benulesku-Bodoni, 57/1, ICS BALTIKA SRL (37322) 23 84 60 office 418, Kishinev, MD 2005 Moldova Ul. Dzhandosova, 96 Baltika-Almaty Ltd (7272) 58 59 40 Almaty, Republic of Kazakhstan Ul. Krasnoznamennaya 94/98, office 4 Baltika-Ukraina Ltd (380) 44 49 4 18 41 Kiev, Republic of Ukraine

Baltika Ltd (996312) 59 64 72 Vefa Commercial Center, office 301 (996312) 59 65 23 Ul. Gorkogo, 27/1, Bishkek, Kyrgyzstan Glockengiesserwall 26, 20095 Hamburg, Baltika Deutschland GmbH (49) 40 728 13 928 Germany

Representative offices in foreign countries

Representation in Latvia (371) 737 46 22 Ul. Brivibas, 144 Riga, LV1012 Latvia Citic Building, Tower A, office 15-B Representation in China (86) 1065129728 Pr. Tsiangomenwai, 19 100004 Beijing, People’s Republic of China Ul. Amira Temura, 15, Yunusabadsky District, Representation in Uzbekistan (99871) 138 30 08 100000 Tashkent, Republic of Uzbekistan

CONTACT INFORMATION 93 BALTIKA BREWERIES

St. Petersburg

Yaroslavl Tula

Voronezh

Rostov-on-Don

Samara

Chelyabinsk

Novosibirsk

94 ГодовойГодовой ототчетчет 20200707 Krasnoyarsk Khabarovsk ANNUAL REPORT 2007 BALTIKA BREWERIES